Protecting your loved ones if you were to fall ill or die

When financial planners talk about “protection” we are referring to a suite of insurance products designed to provide you and/or your loved ones with a financial cushion if you were to become unable to work through ill-health or, in the worst-case scenario, to die. Broadly these fall into three categories: life insurance, critical illness insurance and income protection insurance.

Each of these can play an important role in a financial plan, and provide peace of mind, particularly for clients of working age with financial commitments and/or dependants. Below is a brief explanation of the three main categories of protection.

Life insurance

Most people purchase life insurance when they take out a mortgage on their home – in fact banks and building societies usually insist that adequate insurance is in place to repay the remaining loan if you were to die before your mortgage is paid off. The most common type of life insurance policy is known as “term assurance” and should pay out if you if you die during the term of the policy (for example 25 years).

Term assurance either pays out a fixed amount if you die at any point during the term of the policy or pays out an amount that reduces with each year of the policy, reflecting the fact that the balance of your mortgage will also have fallen. The latter is a cheaper option, and may be adequate if you are single with no dependants.

Most working-age individuals with dependants will, though, want to do more than just pay off their mortgage if they die prematurely. Working out an appropriate level of cover to secure your family’s future can be difficult, which is why we would recommend speaking to a financial planner who can model your family’s likely needs using a lifelong cash flow forecast.

Many workplaces offer death-in-service benefits, some of which can be quite generous. It is important, though, to remember that if you leave or lose your job then your cover will also be lost – and under some circumstances membership of company death-in-service plans can also have implications for the pensions allowances available to higher earners.

Directors of companies, meanwhile, can often secure life insurance very tax efficiently if their business purchases it using something known as a “relevant life plan”. This is an allowable expense for the company and is not a taxable benefit for the individual, so can be quite compelling for business owners.

Finally, “whole-of-life” plans pay out an agreed sum when you die, whenever you die, as long as you keep paying the premiums. These are most commonly used by older, wealthier clients to help their heirs pay an anticipated inheritance tax bill.

Critical illness

Critical illness cover is designed to pay out a lump sum if you are diagnosed with one of a number of serious illnesses. These usually include such conditions as strokes, heart attacks and some forms of cancer, if they reach a certain threshold of severity.

These policies carry a number of exclusions and restrictions so you should choose carefully before taking one out or, better yet, seek expert advice from a financial planner.

Income protection

Income protection insurance replaces your income, up to an agreed level and after an agreed period (for example the time covered by your employer’s sick pay) has passed after you cease working, if you become unable to work through serious ill-health or disability. It pays you a regular income until you are able to return to work, you reach retirement age or you die, whichever comes soonest.

Income protection and critical illness cover are often included in larger employers’ employee benefits packages. Individuals who do not have access to cover through their employers should speak to a financial planner about the most appropriate solutions for their circumstances.

No two providers’ policies are exactly the same, and different insurance companies will have different exclusions, terms and conditions, and records of making pay-outs. It is risky, therefore, to rely on price alone when purchasing any type of protection, which is why we recommend taking expert advice to ensure you get the right type, and amount, of cover for your unique circumstances.

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