Many of us do not like to think about serious illness or death but spend a minute or two imagining the financial impact of this and the results can be quite sobering. Could you support your family, whether financially or by running the family home? Would your spouse or partner be able to run the family home without you? In fact, would he or she be forced to move house? Would your children still be able to get the education you want for them?
If you are single, how quickly would you run out of money if you couldn’t work?

What is the right type of life cover for me?

Life cover can help provide for your family at the time when they need it most. For example, it could pay off your mortgage and other outstanding loans if you were to die or be diagnosed with a terminal illness.

Life cover is essentially a bet on whether you will die within a specified period, known as the term. This might be 10, 15 or 20 years, depending on your circumstances. If you survive to the end of the term, the policy ends and no payment is made. The premiums on a 10 year policy should be considerably lower than those on a 20 year policy as however old you are there is statistically a greater chance of you dying in the next 20 years than in the next 10. If you are a smoker or are in poor health, the premium will be higher. It is important to remember that many employers offer four times salary ‘death in service’ benefit as part of their standard benefits package, which is a good start and can reduce the amount of additional cover you need.

Level Term Assurance

This simply gives a fixed amount of cover over the term of the policy. The sum assured stays the same throughout the term of the policy. Such a policy might be used to cover an interest only mortgage for example.

Decreasing Term Assurance

As its name suggests, the sum assured goes down each year. This is usually associated with a repayment mortgage, as the cover is reduced over the period of the policy to ultimately finish at zero at the end of the term. This ensures that you will not be paying for too much cover and will keep premiums to a minimum.

Family Income Benefit

This pays a regular tax free income to your dependants if you die during the term of your policy. The income benefit is paid for the remaining term of the policy. So, for example, if you took out a 20 year policy (perhaps to coincide with your youngest child finishing university) and died after 10 years, the income would be paid to your dependants for the remaining 10. If you feel that your dependents will need £20,000 p.a. if you were to die, family income benefit will be the cheapest way of providing this. As with mortgage protection, the insurance company’s liability decreases year on year. In the above example, their maximum liability is £400,000, whereas if a level term assurance policy had been selected, the liability would stay at £400,000 until the end of the term.

What is the right type of health protection for me?

Whatever your age or personal circumstances, if you were to suffer a major injury or long-term illness this will have a significant effect on your ability to meet your regular financial commitments. The mortgage, bills and household expenses would still need to be paid. Whilst the State provides some assistance to help you survive, it is unlikely to be enough for you to maintain your current lifestyle.

Even if you are a company employee, your salary will not be paid indefinitely and will probably cease after six months at the latest. If you are self-employed and unable to work, your income will cease immediately. Some employers do offer group PHI plans as part of the benefits package, however, very few will provide critical illness benefits.
There are two main types of health protection; critical illness cover and permanent health insurance (also known as income protection). Whilst there are certainly benefits in having both, affordability will usually dictate that you will pay for one or the other, depending on your circumstances.

Critical illness cover

This is paid as a capital lump sum if the policyholder is diagnosed as critically ill. Different policies cover different illnesses and accidents and it is extremely important to read the small print. A critical illness policy should not be chosen on cost alone. Claims history and the depth of the critical illness definitions should also be carefully considered. Critical illness cover can appear expensive, particularly when compared to life assurance but that is simply down to the likelihood of a claim.

Permanent Health Insurance

This typically provides a monthly income during periods of long-term illness or disability. It is usually taken out up to the age of 65, or whenever you plan to retire if this is earlier. Most plans are primarily aimed at the breadwinner but there are now policies available for people who have non paying jobs such as house-people.

The premiums that you will pay depend on the period of deferment before you start claiming, how much income you wish to insure for, your current state of health and finally, the type of job you have. The longer the deferment period, the lower the cost will be and this decision should be thought out carefully. Ideally, a policy will dovetail State benefits and any payments that your employer is contracted to make to you.

PHI income is normally limited to between 50% and 60% of your gross earnings, minus other benefits you may be receiving. This income is normally tax-free and is paid out for as long as you are unable to work or to the end of the term, whichever is shortest. Care needs to be taken with the definitions of the policy as your idea of being unable to work may be vastly different to the insurance company’s. An ‘own occupation’ definition is therefore much safer than being able to work in ‘any occupation’.

Permanent Health Insurance should not be confused with Private Medical Insurance (PMI) although the two often are! You should review your life cover and health protection requirements whenever there is a major change in your life such as marriage, promotion at work, the birth of a child, moving house or a change of job.