OFFERS OF
WE’RE MORE LIKELY TO INSURE OUR PETS THAN OUR LIVES, BUT COVID HAS MADE MANY RECONSIDER. ROSIE MURRAY-WEST EXPLORES THE OPTIONS
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.
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.