The best financial planning starts with a solid foundation. For most of us, this means protecting what we already have: our home, our life, our loved ones, our livelihoods. It is a sad fact that many people simply do not have the protection they really need.
There are a wide variety of protection policies available these days, many of which are outlined below, but care and guidance must be sought to source the right protection for you and to help make a valid application.
Term assurance is the cheapest - and simplest - form of life cover whereby you insure yourself for a fixed term. It doesn't contain any investment element - it simply promises to pay out if you die within the term. If you don't die within that time, you receive nothing and the policy ends.
Term policies can either be level or decreasing. A level policy simply means the sum assured remains 'level throughout the term of the policy. If you die on the first day of the policy, you get exactly the same sum as you would if you died near the end of the policy. A decreasing term assurance policy on the other hand, will pay out more at the beginning of the policy than it would at the end.
The way a term policy pays out can also come in one of two ways. Those that pay out a tax-free lump sum on death and those that pay a tax-free income to the end of the term, known as family income benefit policies. As usual there are pros and cons to both, a lump-sum policy can be more flexible because it allows your family to have a mixture of lump sum and income upon your death, but the income may be dependent upon investment returns at the time of death. A family income policy on the other hand is often cheaper because the liability is always decreasing for the insurer, for example, if you die in the 18th year of a 20-year policy, the insurers would only have to pay income for two years. It's also easier to work out the level of cover with this type of policy because you simply work out the income you would need to replace.
Mortgage Protection is a simple form of protection based on a term assurance. It can be level or decreasing, depending on whether you have an interest-only or repayment mortgage. Either of these are set up to ensure that they will always pay off the outstanding balance on your mortgage , meaning your loved ones will not be burdened with mortgage repayments or be at risk of losing the family home in the event of a death.
Some policies have rider benefits, which provide an extra degree of cover in addition to the principal policy. Such benefits include:
- Waiver of premium benefit - the premiums are in effect paid for you in the event of defined incapacity due to illness
- Income protection benefit - a percentage of your income is paid to you if you cannot work at your usual employment
- Unemployment benefit - a variety of income protection benefit
- Critical illness cover - the benefit is paid before death on the diagnosis of life shortening disease (e.g. cancer). This benefit may replace the death benefit, or it may be paid as well
Critical Illness Protection
As medical science and healthcare continue to make huge advances we are all living longer lives. Whilst we may be far less likely to die of a heart attack or cancer these days, its a sad fact of life that such illnesses and their treatments can change our lives forever.
Critical illness covers you against events such as these. For example, should you suffer a heart attack, a stroke, cancer, loss of sight, loss of hearing and so on. Upon diagnosis of a serious illness , the product provider will pay out a lump sum. The conditions covered vary by policy and should be examined carefully before application. This money could be used to discharge your mortgage, pay for healthcare or medication, or be used to make conversions and alterations to your home to make living there more comfortable. The decision on how the capital should be spent is entirely yours.
Critical Illness Protection can be arranged as a stand alone policy or as an additional benefit to a term assurance or mortgage protection policy.
Whole Of Life
Whole of life policies are designed to provide life assurance coverage for an individual's whole life, rather than a specified term. Usually they contain a savings component, the idea of which is to build up a fund in the early years which will subsidise the life assurance cost in the later years. A fixed death benefit is paid to the beneficiary, this is either the sum assured or the value of the investment pot, whichever is the greater.
Premiums are usually fixed for the first 10 years of the policy, and each 5 years thereafter, after which the policy is reviewed and the premiums or the sum assured may need to be amended depending upon investment returns. Management fees also eat up a portion of the premiums.
Whole of life policies can be useful for some people to provide for an inheritance tax liability.
Income protection policies are available with a wide variety of features and benefits. You may be eligible for some contracts and not for others, as these policies can be designed for very different types of applicant. The chief objective of an Income Protection policy (sometimes called a Permanent Health Insurance or PHI policy) is that your income will be replaced by a defined monthly benefit in the event that you suffer an accident or serious illness that leaves you unable or only partially able to work for a period of time.
There are a number of protection policies that can provide cover to assist a business in dealing with adverse circumstances. Business protection can be especially important to smaller companies who rely on a few key individuals, unlike larger organisations with greater numbers of staff.
There are two main types of business assurance, Key Person and Partnership Assurance / Director Share Purchase.
Key Person Protection is used to inject a lump sum of cash into the business in the event of the loss of a 'key person'. A key person may be a top salesman, a skilled designer in a design company etc, someone whose death would have a direct and adverse effect on the company's income. This would typically take the form of a term assurance policy, the value of which should be discussed with a financial adviser.
Partnership / Director Share Purchase deals with protecting the families and co-owners in the event of the death of one of the partners / directors. Each party agrees the value of his or her share and a combination of term assurance policies and legal documents are put in place to ensure that in the event of a partner or shareholders death. This provides the remaining co-owners a sum of money to buy out the family of the deceased for a fair sum.