Have your protection policies got you fully covered?

The Covid-19 pandemic was a stark reminder of life’s uncertainties. If you have family responsibilities or financial commitments then you may want to assess how you or your loved ones would cope should something happen to you. More specifically, you may want to work out if you have adequate financial protection and, if not, how you might go about setting it up.

Life insurance versus life assurance

Let’s start with perhaps 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 distinction between the words ‘assure’ and ‘insure’. We are all certain to die at some point 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.

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:

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 of the policy (as long as you keep paying the premiums).

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

Lastly, there is decreasing term insurance, in which the payout decreases over time. 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.

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 developed a serious illness that prevented you from working or functioning as a stay-at-home parent and, thus, from providing for your family and meeting other 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. Recent research by Macmillan Cancer Support estimates that, on average, a cancer diagnosis leads to an £891 drop in household income a month (1). This is significant, as critical illness claims on cancer amounted to 62 percent of all critical illness claims received (2).

Critical illness policies pay out a tax-free lump sum or regular income that you can use for whatever purposes you wish. This could include covering medical costs, loss of earnings, monthly expenses or paying off your mortgage. You could also use it for things such as adapting your house or buying a new car to meet your changing needs, if required. You pay monthly premiums for a chosen number of years, and the policy pays out if and 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 policies aim to replace some or all of your monthly income payments should you be unable to work for an extended period of time. In most cases, income protection can provide a broader range of cover.

For more information on income protection, go to Do you need income protection insurance?

Something to be mindful of is the deferred period in most policies, which means that, despite your illness, there will be a waiting time before claim payments begin. Before taking up such cover, it’s worth finding out if your employer already provides such a policy for you (and, possibly, your partner) as part of your benefits package. You should also find out what your employment sickness pay is, as this could affect how you may wish to set your income protection policy up.

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 make sure you compare different policies carefully and try to make like-for-like comparisons wherever possible before committing.

Protecting you and your family

Finally, 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 here, as a good adviser can help you understand your protection insurance needs. At Schroders Personal Wealth, one of our principles is to conduct regular reviews of your finances; getting the right protection in place is a crucial part of this process.

Sources:

(1) Macmillan Cancer Support, Annual report and accounts 2021, page 18.

(2) Scottish Widows, ‘Protection claims: helping clients navigate the unexpected’, page 2.