lifestyle

Everything you need to know about life insurance and financial protection


(Picture: Getty Images/iStockphoto)

When we think about our finances, it is easy to concentrate on the money we have coming in and going out, and whether we are investing, saving or spending.

But another important part of financial planning is how we protect our money, and most importantly our loved ones, against changes in circumstances that are out of our control.

While building up a large ‘rainy day fund’ is one way to deal with this, a less daunting way to protect against the unexpected is to consider insuring yourself against the inability to work due to illness or redundancy.

If you have a family, you may also want to ensure they would be provided for in the event of your death, by buying a life insurance policy. Collectively, these types of products are known as ‘protection’ and many financial experts say that far more of us should consider them as part of an overall financial strategy.

But they have traditionally been a less popular part of financial advice, with figures showing the UK public are more likely to insure their pets than their lives.

‘We need to make sure we’re covered for anything nasty that might happen, to protect those we love if something goes wrong. This becomes particularly important when we have children,’ says Sarah Coles, personal finance head at financial services company, Hargreaves Lansdown.

‘These things have always been important, but the pandemic has shown us how easy it is for ill health to come out of the blue.’

Research among financial advisers by protection group Guardian finds that coronavirus has prompted many of us to think more about these financial products. Over half of financial advisers have seen an increase in protection sales, with three quarters saying clients are more willing to talk about protection since the first lockdown.

‘This is the single most important change we’ve seen in client behaviour for years and it’s persisting. The experience of 2020 means protection is what people want to talk about,’ says Jacqui Gillies, Guardian marketing and proposition director.

Here’s how to work out whether you need protection products — and if so, which one could be right for you.

What protection is available?

There are several different types of protection products available. The right one for you will depend on your circumstances, dependants and risk tolerance.

Some of the most common include life insurance, critical illness cover and income protection insurance.

Life insurance

As its name suggests, life insurance ensures there is money for your partner and/or children if you die.

There are several different types, with some paying out a lump sum, while others pay out a regular monthly income. The cost of life insurance depends on many things, including your health and family health background, as well as your occupation and the amount of money you need to have paid out to you.

The most expensive type of life insurance is called whole-of-life cover – as long as you continue paying the premiums, this type will pay out whenever you die. You can also take out what is called term assurance, which is a life insurance policy tied to a specific debt such as a mortgage, and will only pay out if you die during the time you are paying off this debt.

If you buy a term assurance policy, you can set it so that the amount paid out increases or decreases over time, or stays the same. If it stays the same, it is called level term assurance.

Some people choose to have their life insurance written in trust for the family, which can help with administration and costs when a claim is made.

Income protection insurance

Income protection insurance not only pays out if you die, it helps your family to keep up their living standards if you become so unwell that you can no longer carry on working.

Income protection products provide a regular income if you are ill or injured, paying out a percentage of your earnings. This is likely to be about half to two thirds of your usual salary,

Different types of income protection insurance will work in different ways, with some paying out only once an employer stops paying sick pay, and others linked to inflation levels.

There are also short-term income protection policies, which can be a cheaper option.

Critical illness cover

This is a more limited – and often cheaper – version of income protection insurance. Critical illness cover pays out only if you are diagnosed with a critical illness that is named on your insurance policy.

Some of these policies will pay the same amount no matter how severe your condition. Others will pay more if the illness is severe.

The list of illnesses covered will depend on the insurer and policy, and often includes certain cancers, heart attack and stroke. In some cases you might be given the opportunity to name specific illnesses.

Family income benefit

This type of insurance is suitable for families with young children. Instead of a lump sum, it pays out a certain amount each month for a specific term if you die during the term. In some cases, it may also pay out if you are diagnosed with specific illnesses during the term and cannot work.

With family income benefit, the payouts run for a set time, irrespective of when they begin. So, if the policy lasted for 20 years and was triggered 19 years and 11 months into the term, it would only pay out for one month.



‘Family policy was a lockdown lifeline’

Over-50s life assurance

These plans promise to pay a guaranteed fixed sum to your dependants when you die, as long as you keep paying into the plan.

There are usually no medical questions asked with these plans, but they can be expensive, especially if you keep paying and live a long time, as the lump sum is fixed.

When you should and shouldn’t by cover

Not everyone buys protection insurance, and you might not feel you need cover. It is particularly useful for families with large outgoings such as a mortgage, school fees or living costs, where there would be a struggle to continue to pay if one breadwinner was unable to work.

But as young families get older and become less dependent, protection needs can be reassessed.

You can buy cover online, directly from banks and insurance firms, while comparison sites such as GoCompare, MoneySupermarket and ComparetheMarket all offer ways to weigh up different products.

Or look at Lifesearch, a protection-specific site. If you want to go it alone, take care filling in the forms and reading the small print. Insurers require you to disclose all pre-existing conditions for life insurance, as well as asking for family medical information.

You will need to work out how much cover you might need, which involves taking into account any debts you might have, family commitments and any existing cover you already have, for example death-in-service benefit through an employer.
If you are feeling less sure, a specialist financial adviser can help you to choose the most appropriate protection products for you.

While advisers must charge their customers for selling investments and pensions, they can be paid a commission for selling protection products, so it is important to check you are getting independent advice on what is right for you.

The cost of protection policies varies hugely, depending on age, weight, family history and habits. For example, a 40-year-old female non-smoker could get £100,000 of level term life cover for £8.57 a month for 25 years with no critical illness cover.

A 50-year-old male smoker with no other pre-existing issues could get £100,000 of level term life cover and £25,000 of critical illness cover for just over £79 a month for 20 years, while a 40-year-old male non-smoker could get ten years of family income benefit of £100,000 for £5.49 a month.

A 73-year-old non-smoking male paying £25 a month into an over-50s plan could ensure his relatives receive a £3,125 lump sum on death, if he dies at least a year after starting the plan.

To determine if you need protection, consider your current financial situation and savings and imagine what you’d do if you were unable to work, or what your family might do if you couldn’t provide for them.

If your family set-up is complex, you may also need to consider what might happen to a separated parent of a child. ‘If you split up and you have children, you need to make sure your ex has cover,’ says Sarah Coles of Hargreaves Lansdown. ‘If your partner is paying maintenance, you need that to be covered if they pass away.’

Sites such as Unbiased and Vouched For contain lists of vetted financial advisers.

How coronavirus changed the game

Coronavirus has affected the availability and terms and conditions of some insurance products.

Adam Higgs, head of research at protection experts Protection Guru, says the number of weeks before some sickness benefits are paid out lengthened on policies after the pandemic.

However, Adam, pictured below, says there has not been much indication of rising prices for the policies, despite record numbers of life insurance payouts.

He adds that there have been fewer payouts from critical illness policies, simply because many people have not been tested or diagnosed with critical illnesses, since they have not been visiting their GPs.

Scott Gallacher, financial adviser at Rowley Turton in Leicester, adds that it has been harder to get policies for older clients, with insurers limiting the ages they are willing to cover.

‘Hopefully this will reverse shortly with the vaccination programme protecting the most vulnerable,’ he says. The pandemic has also made it virtually impossible to obtain one type of protection insurance: unemployment cover or employment protection insurance.

This insurance, as the name suggests, pays out if you lose your job and is often tied into an insurance policy called Accident, Sickness And Unemployment cover (ASU).

However, most insurers have now removed unemployment cover from their policies.

Adam, at Protection Guru, says it isn’t yet clear when these policies might become available again.


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