Arranging the right type of protection insurance can seem like a bit of a maze. If this is the first time you have considered it then hopefully you will find this a useful aid and it will point you in the right direction.  Scroll down if you’re interested in reading a real-life case study or our FAQs.

When considering arranging protection insurance it’s important to take into account your circumstances and what situations could leave you and your family in a vulnerable financial position.

For example, if you or your partner became ill, or had an accident or worst still was to pass away, apart from the emotional impact, what would the financial consequences be for you and the rest of your family?

It might be that the household is relying on their income. This could have a potentially devastating impact. The good news is you can insure yourselves against some of these situations, which can help to provide a vital financial cushion.

Do I need Income Protection?

For most people the most important product to consider is an Income Protection policy. This type of policy will pay you a replacement income if you were unable to work as the result of an accident or sickness. The most common reasons for claims are due to back problems and mental health issues. You can learn about becoming financially stable here at refreshdebt.co.uk.

Having an Income Protection policy in place would mean that you will still benefit from the security of an on-going income and you can concentrate on getting better without the stress of worrying about money.

Do I need Critical Illness Insurance?

Critical Illness Insurance cover also makes sense for many people. This type of policy would pay out a lump sum in the event of you being diagnosed with an illness covered by the policy.
Most critical illness policies cover between 40 – 80 specific conditions, but it would pay to take advice as the ‘policy wording’ can differ tremendously between one policy and the next. All Critical Illness Insurance policies cover certain cancers, multiple sclerosis, heart attacks, strokes, kidney failure, coronary artery bypasses, and major organ transplants.

Many people take out critical illness cover to ensure their mortgage debt would be paid off if they were to be diagnosed with one of these serious conditions. However, even if the cost of this level of cover is too much, it is always possible to arrange a lower sum assured to keep the costs within your budget. After all, some cover is better than none.

Critical Illness Insurance cover may well be suitable, probably as well as an Income Protection policy, if you have a mortgage. For example, if you were diagnosed with cancer, and the diagnosis meant that you were unable to work for a year or two whilst you underwent treatment, an Income Protection policy would start paying you a monthly income, and a critical illness policy would pay you a lump sum, which you could use to pay for treatment, pay off some or all of your mortgage, or simply put it into your bank.

Do I need Life Insurance?

Life insurance is suitable if someone has dependents who need the security of a lump sum, in the event of you passing away. Many people also take our life insurance which would pay off a mortgage in the event of someone dying. Depending on your circumstances and to ensure you are taking out enough life cover, over a suitable period of time, it would probably be worth you taking some advice.

  • Case study

    Mike (45) and Susan (43) are married with 2 children aged 12 and 10. They are both working on a full time basis. They have a mortgage which has a balance of £130,000 that will be paid off over the next 15 years. They are not sure when they will be able to retire, but are hoping to be able to stop working by the time they are 67. They are both in good health and are non-smokers.

    They are interested in arranging life and insurance to cover the mortgage as well as providing additional cover for the family. They are also interested in arranging some critical illness cover which will pay them a lump sum in the event of a diagnosis of a serious medical condition.  They are not sure if an Income Protection policy would be mortgage suitable as they don’t have much in the way of savings and they would soon get into financial difficulties once their employers’ sick pay stopped after 1 month. They said their maximum monthly budget is £70.

    How much cover can they get within their budget?

    Protecting their mortgage – a joint decreasing life policy with an initial sum assured of £130,000 which deceases over the 15 year term – Premium £14.07 a month. This policy would pay out enough to repay the mortgage if one of them passes away.
    In an ideal world they would have enough critical illness cover in place to enable them to pay off the mortgage in the event of one of them being diagnosed with a critical illness; however the monthly premium would be above their budget at £77.52.

    Personal and family protection – as an alternative they could arrange individual life or earlier critical illness policies which would pay out £40,000 in the event of death or a critical illness before they reach the age of 67, when they hope to retire. Mike’s premium would be £29.78 and Susan’s would be £27.05.

    Finally they could both arrange an Income Protection policy which would pay a monthly benefit of £1,000 for a maximum period of 2 years if they were unable to work as the result of an accident or sickness before they reach the age of 67, after a waiting or deferment period of 4 weeks. Mike’s premium would be £18.79 and Susan’s would be £17.45 per month. The premiums are reviewable and will increase each year as they get older, however this would be a cost effective way to arrange a reasonable level of protection within their budget.

    Their options:

    Take out the mortgage protection policy (1) and the critical illness cover (2) for a total monthly premium of £70.79.

    Take out the mortgage protection policy (1) and the income protection cover (3) for a total monthly premium of £50.31.

    Quotes correct as of Dec 2018. Please note that the premiums provided are indicative only and based on this specific example, which is shown for information purposes only. Your own circumstances will determine whether the amount payable is more or less than the figure quoted.

Q: I have death in service cover provided by my employer, so I don’t need any life insurance.

A: Whilst this is good news, you should probably look at this as a bonus. If you left the job, you would lose the free benefit. You may then decide to arrange cover independently, however you would then be older, so it would cost more (the older you are when you arrange cover, the more it will cost). Sometimes people’s health can also mean the insurance premiums are increased by the insurer, and in more extreme cases people may not be able to get any cover at all. As a general rule the best time to arrange cover is now as none of us knows what could happen in the future.

Q: I don’t have any children, do I need insurance?

A: It may well be that you don’t need any life insurance, but Income Protection or Critical Illness insurance may well be suitable. Ask yourself, what would be the financial impact on your household or partner if you were unable to work or if you passed away?

Q: What’s the difference between decreasing term and level term cover?

A: Decreasing term insurance is really only suitable for someone with a repayment mortgage. It is a cost effective way of covering the mortgage if the worst was to happen and can be arranged on a single or joint basis.

Level term cover pays out a fixed lump sum (i.e it doesn’t reduce, like decreasing term) if the policy holder passes away during the term of the policy. It also can be arranged on a single or joint basis. This cover can be used to cover a mortgage or to leave some money for the family, or both.

Q: What is a deferred (or waiting) period?

A: This is the period of time you will have to wait between being signed off work and when the benefit from your Income Protection policy starts to pay out. You set the deferred (or waiting) period at the time of arranging your policy. Ideally this should dovetail with the sick pay you receive from your employer.

Q: Would it be a good idea to index link my policy?

A: In most cases the answer is yes, especially if it is a long term policy, and is designed to protect your family or to cover your income. An index linked option helps protect the benefits against the effects of inflation. Each year you would receive a letter from the insurance company letting you know what the new premium and benefit is for the forthcoming year (most of these policies increase by RPI/or a set percentage such as 5% per annum). If at any stage, you would like to opt out of the indexation option, all you need to do is contact the insurer who will then freeze your premiums at their current level.

Q: What is terminal illness cover?

A: Terminal illness cover is included within most life insurance policies. The life policy will pay out if someone is diagnosed with a terminal illness during the term of the policy (a few insurers would decline a terminal illness claim if it was made during the last 12 months of the policy). An Insurer’s definition of a terminal illness is that someone has been told they have less than 12 months to live.

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