Beginner's Guide to Protecting your Future
The Financial Conduct Authority does not regulate taxation and trust planning.
It is a sad fact that whilst most of us are quite happy to insure our car, our house and our travel arrangements to their full value, few of us take quite as much care over our health and loved ones.
This guide is designed to highlight the issues which may concern you and introduce you to the different types of cover available which can help secure your family's future. We outline what the different types of insurance could provide and also try to give you a basic idea of how to calculate the amount of cover you might need.
If any of the enclosed information needs further explanation, or you need details on how your own situation might be best served, please do not hesitate to give us a call on the number below.
LIFE ASSURANCE IS A STAPLE FORM OF PROTECTION THAT MOST OF US NOT ONLY UNDERSTAND BUT ALSO SEE AS A NECESSITY.
A common reason for taking out life assurance will be to cover a mortgage but it is also part of the review we all undertake, perhaps after getting married or, more likely, when we have children.
For a single person with no dependants, life assurance may not be necessary. If you have debts and no savings, then a small amount might be worth considering to pay expenses and prevent someone else being landed with those debts if they have insurable interest and are financially dependent on you. There is also an argument that you should cover a mortgage but in this case, if you are happy to pass the property back to the bank, or if your beneficiaries are more than able to cover mortgage payments whilst the house is sold, then there may not be a need for it.
If you have dependants, however, you need to look at the consequences for them if your income ceased. How much do you earn? Do you have debts? How much is your mortgage or rent? Do you pay school fees? How long before your children will be working? Does your partner work? Would their income be enough to meet all the outgoings? Even if you don't work, there can be a considerable cost involved in replacing your contribution to the household, such as paying for help to look after children and/or the house. Finally, life assurance can be used in inheritance tax planning.
Income Protection Insurance
REGARDLESS OF WHETHER YOU ARE SINGLE OR HAVE 10 DEPENDANTS, IF YOU ARE SUDDENLY UNABLE TO WORK AND YOUR INCOME DISAPPEARS COMPLETELY – THIS HAS A DIRECT IMPACT ON YOU AS WELL AS ON THOSE FINANCIALLY DEPENDENT ON YOU.
Income Protection Insurance is less well known than life assurance but potentially has more implications. What it’s designed to do is replace a proportion of your income in the event you are suddenly unable to work. There are generally limits on the level of benefits that can be claimed under Individual Protection Insurance plans, usually in the region of 50-60% of the last year of earnings before any claim - less deduction for the basic level of employment and support allowance (ESA). This income is paid until the end of the policy term or until you are able to return to work, whichever is the earlier. Consequently, whilst you are recovering or coming to terms with changes in your life, your financial position is secure so that you are able to maintain a similar lifestyle. This can be of particular benefit if you are self-employed and when your job does not come with any significant sick pay.
The cost of Income Protection varies depending on what deferment period you choose and your occupation. You can choose a longer deferred period to reduce the cost of cover. The more savings you have, the longer you can fund yourself before a claim needs to start paying out – and therefore the cheaper the policy will be.
THE OTHER MAIN TYPE OF COVER WHICH MANY OF US SHOULD CONSIDER IS CRITICAL ILLNESS COVER.
Critical illness policies are designed to pay out in the event that you are diagnosed with a specified critical illness. Some forms of life cover can pay out a lump sum or income, a critical illness policy in the same way can pay out a lump sum or regular income, the objective of which is to help you fund changes which may need to be made to your lifestyle as a result of that illness. For example, you may need to move house to be nearer relatives or friends. You may need to make changes to your existing house to meet new mobility requirements, or you may wish to pay off your mortgage and reduce your outgoings. Alternatively, you may simply want to give up worrying about money and make the most of your opportunities whilst you can. Like Income Protection Insurance, Critical Illness cover can be for single people with no dependants as it could be the only source of ongoing financial support in the event of critical illness.
As confirmed above, these types of policy cover a range of critical illnesses. For specific definitions please refer to the Policy Documents.
These types of plan usually have no cash in value at any time, and will cease at the end of the term. If premiums are not maintained, then cover will lapse.
Long Term Care
Long term care planning is a specialist area of financial planning which is designed to ensure you can pay the cost of medical expenses or care home fees if you are no longer able to live independently. There are many types of cover – from an immediate annuity, which pays an income to a care home in exchange for you paying a lump sum to purchase the annuity, to a pre-funded insurance plan, where premiums are paid into a policy now, which will pay your fees in future – should they ever be required. Long term care cover is relatively expensive – but this is because the fees in care homes are expensive and continue to rise. Those who have equity in their houses or substantial savings may be happy to utilise those assets to help pay for any future requirements. However, this could jeopardise the chance of handing over your assets to children or other beneficiaries. Also with no guarantee of how long care fees will need to be funded, a non-insurance approach can prove a bit of a lottery as to whether there will be enough money available.
The plan will have no cash in value at any time, and will cease at the end of the term. If premiums are not maintained, then cover will lapse.
Your home may be repossessed if you do not keep up repayments on your mortgage.