Are your protection policies up to scratch?

  • 06 April 2021
  • 10 mins
  • The world has faced an unprecedented health emergency in the Covid-19 pandemic, with more than 4 million confirmed cases in the UK within the first year.

  • Everyone with family responsibilities or financial commitments should consider how they or their loved ones would cope financially should something happen to them.

  • Our research commissioned in February 2021 found that 3 in 10 of those living without protection insurance say that the pandemic has made them more likely to consider it (29%).

The coronavirus outbreak has given a new urgency to the question of how you or your nearest and dearest would cope if something happened to you. According to Professor Stephen Powis, the medical director of NHS England, Covid-19 is the biggest global health emergency in a century. This has caused almost everyone to turn their mind to the ‘what ifs’.

Life insurance vs life assurance

Let’s start with the most well-known of all protection policies, life insurance. This is designed to provide your dependents with a lump sum upon death.

There are two ways in which you can insure your life. One is called life assurance and the other is called life insurance.

What’s the difference? Well it lies in the subtle difference between the words “assure” and “insure”. We are all guaranteed to die at some time and the term ‘assurance’ reflects this: the insurer is guaranteed to have to pay out. This type of policy is therefore also known as “whole of life cover” as it will stay in place for the rest ("whole") of your life.

But the word “insure” means “just in case”. This type of policy will only cover your life for a set period of time. For this reason it is also known as “term insurance”

Because of this difference in the risks the life insurer faces, whole of life policies tend to be more expensive than term insurance policies.

These protection policies have no cash-in value at any time. If you don't pay your premiums on time your cover will stop, your benefits will end, and you'll get nothing back. If the benefit amount has not been paid out by the end of the selected term, the policy will end and you'll get nothing back.

The different types of term insurance

As we have seen, term insurance policies are designed to provide temporary protection for a specified period of time.

There are three different types of term insurance to consider:

  • Level term insurance pays out a fixed sum if you die during the term of the policy. For example, a £100,000 policy over a 40-year term will pay out £100,000 whether you die in year one or year 39.

  • But over 40 years, the cost of living could increase quite markedly. With increasing term insurance, the pay-out rises in line with inflation or by a set amount each year. But you must bear in mind that your premiums will increase as your cover rises.

  • Lastly, there is decreasing term insurance. This type of cover is commonly used in conjunction with a repayment loan, where monthly payments include an element that pays back the amount borrowed. This type of policy tends to be more affordable than level or increasing term insurance as the risk to the insurer reduces the longer the policy is in place.

Read more: How can life insurance improve estate planning?

Protecting against illness

Life insurance could take an enormous amount of pressure off your loved ones during a very difficult time and can certainly help in maintaining financial stability. But what if you contract a serious illness which prevented you from working and, thus, from providing for your family and meeting other financial responsibilities. To prepare against such an outcome, you could consider taking out critical illness cover. This is an insurance policy that helps protect you if you become critically ill during the term of the policy.

It pays out a tax-free lump sum that you can use for whatever purposes you wish. This could include covering medical costs, loss of earnings, or monthly expenses. You pay monthly premiums for a chosen number of years, and the policy pays out when you are diagnosed with one of a set list of conditions covered by your policy. These can vary from product to product and amongst the different providers.

Income protection could also cover you for long term illness. Such a policy would aim to replace some or all of your monthly income payments should you be unable to work as a result of a long-term illness or injury. In most cases income protection can provide a broader range of cover.

Something to be mindful of is that there is a deferred period in most policies during which, despite your illness, there will be a waiting time before claim payments begin. Before taking up such cover for yourself and possibly your partner, It’s worth understanding if your employer has not already assigned such a policy on your behalf as part of your benefits package and what your employment sickness pay is as this would impact the validity and how you may wish to set up your income protection.

Arguably, income protection is more relevant now, perhaps more than ever, with so many people impacted by coronavirus. Yet our recent survey found that income protection is the least popular protection product with just 7% of those questioned holding a policy. This may be due to the fact that income protection is understood by so few. Our research discovered that only 13% have a good understanding of how income protection works.

Tax treatment depends on individual circumstances and may be subject to change in the future.

Read more: Do you need income protection?

Protecting you and your family

When reviewing your protection needs, it is important to consider all your financial commitments in depth and take an open and honest view of what you and your family might need in terms of protection. How much cover do you need? How long for? A defined period of time or for life? When would you need critical illness or income protection policies to start paying out?

Professional advice could be invaluable in this regard. This is why our advisers are available to help you understand your protection insurance needs.

With a competitive insurance market, providers constantly review their pricing and each policy should reflect an individual’s personal profile including your age, lifestyle, desired level of cover and medical history. So compare different policies carefully and try to make like-for-like comparisons wherever possible before committing.

Important information

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.

Fees and charges apply at Schroders Personal Wealth.

In preparing this article we may have used third party sources which we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.

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