Personal Protection comes in many forms there are three situations that we should all consider.
- What happens if I die?
- What happens if I have a Critical Illness?
- What happens if I cannot work due to long term accident, injury, or illness?
When deciding what personal protection you should have, you need to prioritise and consider what’s most important and what life stage you are in, for example, single no dependents, with and without liabilities, in a relationship with financial dependents, with and without liabilities.
A single person, with no financial dependents or liabilities does not really need life cover, if they developed a critical illness though, it will impact on them and they should consider what might happen if they have a heart attack, stroke or other critical illness.
We should all consider what would happen if you could not work for 6 months, 12 months or ever again. How long will your employer pay you? How long will your savings last? What will happen once these safety nets, if you have them, have been taken away?
If we have a family or someone that is financially dependent upon us. What happens to them if your income is no longer available? How will they pay for and maintain the mortgage and other liabilities? What happens to your home if it has a mortgage on it that cannot be paid?
Many of us will feel invincible and think it will never happen – sometimes it does. If you have failed to plan, the financial worries that may often come, will add to the pain and distress circumstances have already caused.
What should you consider and what are the options available?
Consider how much you need; this will depend on what is most important to protect and how much budget you can make available.
- Do you want to protect the income that you or your financial dependents will lose?
- Do you only want to protect your mortgage liabilities?
- How long you need protection for, until you pay off your liability? Until you retire?
Types of Cover:
This will only pay out if you die within the term of the policy, the older you are and the longer you need it for the more expensive it will be, it can be relatively inexpensive and should always be considered.
The mains types of life cover are:
Level Term life only; Is often used to replace the income that is lost due to death or pay a liability. This provides a payment that will be the same regardless of when you die, for example if a 20 year term for £100,000 as the amount payable or sum assured is taken, £100,000 will be paid, if you died in year 1 or 20, as long as you die within the term, this will be paid, if you do not, you will get nothing back!
Decreasing Term life only; Is normally used to pay a repayment mortgage or loan. This provides a payment that will reduce over time, for example if a 20 year term for £100,000 is taken, £100,000 will be paid if you died in year 1, but if you died in year 20 you might get £5,000. Like level cover, as long as you die within the term, something will be paid.
Family Income benefit This is life cover that pays out a regular monthly or annual income if you die within the term, depending upon how much is needed for example, if you needed £20,000 per year until the children were independent in 10 years’ time, then if you died after the first year £20,000 per year would be paid for the next 9 years, if you died after 8 years then £20,000 would be paid for the next 2 years.
Critical Illness benefit
Is often added to life cover and will benefit the life assured as well as those that might be financially dependent upon them. The sum assured or amount of cover is paid on diagnosis of several specified illnesses and these will include certain cancers, heart attack, stroke. Different insurers will have different levels of cover and different definitions, so it is important to consider this.
Like Life Cover, Critical Illness can be provided on a level basis, decreasing basis, and increasing basis. It is also much more expensive, but it is worth noting that a man is over 4 times more likely to have a critical illness before age 65 than death*.
Permanent Health Insurance
This is a benefit that is paid if you are unable to work due to long term illness or injury, it can be paid for a specified term for example to retirement, or it can be paid for a fixed term e.g. 5 years. It will have a deferred period for example 6 months where it will not provide a benefit until you have been unable to work for 6 months and will then pay until you are able to return to work or to the end of the policy term, whichever comes sooner. The benefit paid is dependent upon the income you generate; caution should be exercised for those that are self employed to ensure that you get what you are paying for!
There are other forms and types of protection you could contemplate, there are also several options that should be considered, for example:
- What do you have already?
- Are the premiums guaranteed?
- Your age health and smoker status
- Do you need level decreasing or increasing benefit?
- Do you want to protect your ability to pay the premiums if you cannot work for 6 months of more?
- Do you want the benefits to put in Trust, so the right people get the benefits at the right time?
Protection is the first step in considering your financial plan, if you cannot work and earn an income you will never be able to save and build your wealth for the future, whether that is for you or those that are financially dependent upon you..
Please note the above examples highlight areas you may wish to consider in respect of any personal protection requirements you may have and does not constitute personal advice. If you would like advice on what you need and how you can provide for it, please call for a free initial appointment to discuss.
*Albert Goodman Chartered Financial Planners is the trading style of Albert Goodman Financial Planning Ltd, which is authorised and regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate inheritance tax planning.