MONEY SAFETY NET
How would you cope with the high-wire financial trapeze act if you couldn’t work? Here’s how to . . .
PROTECTING the family’s finances against the consequences of serious illness – or even death – is challenging in a difficult economic climate. But there are ways to prioritise cover and keep a lid on premiums.
WORKING nine to five is enough to drive you crazy if you let it, as the song goes. But if you have to give up your job as a result of a serious accident or ill health – or worse, die prematurely – the resulting loss of income can quickly generate greater grief for a family as any savings drain away.
Financial support from the State is limited – and only some employers will lend a helping hand.
Building a personal financial safety net can reduce money worries.
Craig Palfrey, of Cardiff-based financial adviser Penguin Wealth, says: ‘Most people have car and pet insurance, but many fail to protect their families’ livelihoods. Often this is because they don’t think they can afford it. But premiums can be manageable and the industry’s record for paying claims has improved.’
Figures from the Association of British Insurers show that more than 97 per cent of claims on all types of protection policies are met – with £10million a day paid out.
WHY?
EVERY year, 95,000 people of working age – between 21 and 65 – die prematurely. Without a financial cushion in place, dependants can struggle.
Take-up of life insurance – which pays out a tax free lump sum on death – is higher than for other forms of protection cover. This is because homebuyers are prompted to purchase it when they take out a mortgage. Even so, only six million of the UK’s 27million households have such cover.
Premiums can be as little as £5 a month for £150,000 of cover. For couples with a joint mortgage, such insurance can be a financial lifeline for the one left behind, who might struggle to meet repayments alone.
WHY NOT?
SINGLE people have no need for life insurance. Those with partners who earn enough to support themselves and any children may also find life insurance premiums an unnecessary extra expense.
Employees should also check workplace benefits for free ‘death in service’ – this pays a tax-free lump sum to the families of those who die while working for their employer and is usually a multiple of up to four times salary. One pitfall is that death in service cover stops as soon as you leave an employer.
BELLS AND WHISTLES POLICY
THE cream of life insurance is a whole-of-life plan, which guarantees to pay out whenever the policyholder dies, so long as premiums have been maintained.
It is also the most expensive life cover. If premiums are ‘reviewable’ rather than ‘guaranteed’ they can leap once you reach the age of 65.
Scottish Widows offers a policy for a 40-year-old non-smoking office worker for £118 a month for £210,000 of cover. Such plans are often chosen by those who want to cover a large inheritance tax bill.
ECONOMY PLAN
LEVEL term life insurance is a lower cost alternative and pays out if death occurs within a fixed period – often matched to the term of an interest-only mortgage.
According to broker LifeSearch, our 40-year-old would pay £16 a month for £210,000 cover over 20 years – seven times less than for a whole-of-life plan.
Even more affordable is a decreasing term policy – where the proceeds from any claim shrink over time.
This is designed to dovetail with a repayment mortgage, an arrangement where part of a loan is paid off each month as well as the interest. A 20-year plan costs £10 a month from insurer Beagle Street.
A third option is family income benefit. This pays a regular benefit to those left behind – with the policy term often timed to cover the period children are at school. A 20-year plan paying £1,000 a month from death until the policy’s end date costs £11 a month from insurer Royal London.
A drawback is that if the policyholder dies just a month before cover ends the payout will be just £1,000.
WHY?
ONE in five workers will need to take at least three months off work due to illness or injury during their working life.
As many as one in ten will have more than six months off, according to statistics gathered by Tom Conner, of financial adviser Drewberry Insurance.
He says: ‘Our research also shows one in three who are off for more than six months are still not working five years later.
‘With statutory sick pay at just £88.45 a week for up to 28 weeks and welfare benefits possibly the only option thereafter, insurance is worth considering. Many people SUPPLY teacher Sylvia Davies nearly missed out on a five-figure insurance payout after having a cancerous breast lump removed six years ago because, at the time, she did not realise she could claim on a policy she had bought in 2003.
Sylvia, from Cardiff, had three months off work for radiotherapy treatment and has since been cancer free.
It was only after meeting a financial adviser three years ago that she discovered a long-forgotten critical illness policy.
Sylvia says: ‘I went with my husband Gareth for some general financial advice but our adviser picked up on the fact I hadn’t claimed. I was still paying the
believe they will get more from their employer than they actually would.’ Income replacement policies usually pay a monthly tax-free sum equivalent to 70 per cent of gross salary.
Emma Thomson, of broker LifeSearch, says: ‘The aim with these policies is to cover after tax income and provide enough benefit to pay the mortgage and put food on the table.’
WHY NOT?
SOME employees will get financial assistance through work in the event of illness, although more often than not payment will be limited to a few months. Check any entitlement as many employers can be poor at communicating such benefits.
BELLS AND WHISTLES POLICY
PLANS providing an inflation-linked income until age 65 are the gold standard.
Avoid plans where a claim is only paid if the policyholder cannot do any job – it means a claim is more likely to fail. LifeSearch’s Thomson says: ‘We only recommend policies that will pay benefit if you cannot carry on your own occupation.’
ECONOMY PLAN
THE longer a policyholder can wait for benefit after falling ill, the cheaper the premium. Thomson says: ‘People often opt for between a three and six-month delay, depending on sick pay arrangements from work.’
Waiting 26 weeks cuts the premium for our 40-year-old to £25 a month if they choose a policy with Friends Life.
A short-term policy that pays out for just a year can reduce premiums sharply. A plan paying a monthly income of £1,000 for a maximum two years costs £13 a month from Friends Life – assuming a 13-week wait.
For those who would want faster payment, British Friendly charges £35 a month for a five-year plan – and pays out after one week off work.
But the premiums are reviewable, so they are likely to rise.
WHY?
THOUSANDS of people are diagnosed with a serious illness each year, but thanks to medical advancements they can survive for many years.
Critical illness cover is designed to provide a financial buffer – maybe paying off the mortgage or the funds to make adaptations to a home, such as wheelchair access.
It pays a tax-free lump sum on diagnosis of a serious illness – so long as it is listed in the policy and is sufficiently serious in the eyes of the insurer.
All plans cover a heart attack, stroke and cancer – so long as they are of sufficient seriousness. Some insurers make partial payments if they consider a condition to be less severe – such as a non-invasive cancer. Some policies include cover for children as standard.
BELLS AND WHISTLES POLICY
TOP-of-the-range plans come with a high price tag. Insurer Vitality offers two plans – one covering 114 illnesses and the other 150.
Our 40-year-old would pay £135 a month for the basic plan but £160 for the ‘booster’ version. Drewberry’s Conner says: ‘The booster cover means you would be covered 100 per cent for conditions not covered by other insurers, such as some cancers.’
ECONOMY PLAN
ONE of the easiest ways to trim protection insurance bills is to combine critical illness and life cover. This usually ends up costing the same as a standalone critical illness plan – but there will only be one payout for whichever event comes first.
A joint plan for our 40-year-old to cover a £210,000 repayment mortgage – decreasing term cover over 20 years – costs £54 a month from Legal & General.
Another low-cost option is a policy covering only the most common serious illnesses.
AIG, for example, has a new plan that covers just cancer, heart attack and strokes – conditions that account for 85 per cent of all critical illness claims. It usually costs a third less than a bells and whistles alternative. This would cost our 40-year-old £65 a month – at least half the price of Vitality’s cover. PROTECTION policies appear dirt cheap on comparison websites – but these may well be riddled with catches and not provide the cover expected.
It is better to use a specialist broker such as LifeSearch, London & Country and Highclere Financial Services. Alternatively, find a financial adviser specialising in protection through websites unbiased and VouchedFor.