CASH FOR A CRISIS

Study reveals most families have no financial protection for serious illness or death

VACCINATION against illnesses may be routine, but protecting our finances from the impact of sickness or death is ignored by most families – leaving many exposed to financial disaster.

According to research by insurer Aviva, three quarters of families are nervous about their lack of preparation for the financial shock of bereavement or illness – yet do nothing about it. Six in ten have no life insurance in place and even fewer have cover for illness.

The insurance industry’s image is partly to blame, with people reluctant to fork out on premiums, fearing a claim could be rejected. But insurers are getting their act together and are more open about their claims statistics – which are improving.

Protection expert Alan Lakey of Highclere Financial Services in Hemel Hempstead, Hertfordshire, says: ‘The industry has got better, with more than 90 per cent of claims routinely met. It can never be 100 per cent, as there will always be incorrect or fraudulent claims.’

Aviva has launched a campaign to get the nation better protected by prodding people to think about insurance at key life stages.

Its Rethinking Protection proposals suggest the industry and Government work together to provide information at key times such as when a baby is born, when a home loan is taken out or when a couple divorce or separate to ensure children’s financial security should a parent die or fall ill.

It wants to preach the message in schools too as part of personal finance lessons, which become compulsory in secondary schools this September.

The report calls for an ‘auto-enrolment’ scheme in the workplace so that more staff are automatically covered, or tax incentives to encourage companies to introduce voluntary schemes, already operating successfully in The Netherlands and Germany.

Aviva says people who expect to depend on the State when illness or death strike are in for a shock. Though reforms to bereavement benefit will be implemented in 2016 to make it easier to understand and claim, payouts are unlikely to help for long.

Under the reforms, the most that will be paid to those eligible is a £2,500 lump sum and monthly payments of £150 for a year for a surviving spouse or civil partner under State Pension age without children. A spouse or civil partner with dependent children would get at most £5,000 and £400 a month for a year.

Louise Colley, protection director for Aviva, says: ‘This leaves little to cushion families against other financial adjustments after bereavement, such as increased childcare costs. The Government should support reform to bereavement benefit with a campaign to encourage families to understand the financial implications of death.’

Only four in ten mortgages are protected by life insurance, which means families risk losing their homes.

If a breadwinner becomes too ill to work, State help is limited. The maximum benefit is £108 a week. Housing relief helps only with interest payments on up to £200,000 of a mortgage, and not capital repayments.

Lakey says families shouldn’t fear the cost of protection, adding: ‘Life insurance can cost as little as £18 a month for £100,000 of joint cover over 25 years for a couple both aged 40.’

He believes income protection is a priority – cover that provides a monthly sum in the event of serious illness. Statistics show you are four

times more likely to be off work with a serious illness than die before you retire.

‘If income stops then everything else falls apart,’ he says.

Picking a policy can be tricky. Some insurers treble premiums for those in risky occupations though others, primarily friendly societies, do not.

Also some insurers fix premium rates while others increase them annually.

Reviewable premiums often start off cheaper than guaranteed rates and can work out better value.

You can also buy short-term income protection that will pay an agreed monthly sum, typically for one, two or five years if you are off work because of accident, illness or unemployment.

‘This can be worthwhile if you break a leg, but if you’re paralysed you won’t be covered when the period ends,’ says Lakey.

Critical illness cover, which pays out a tax-free lump sum if you suffer a serious illness such as a heart attack, often also includes life insurance.

Lakey prefers family income benefit. This pays a widow or widower an income, usually until children reach age 18.