All you need to know about life cover, critical illness and income protection.
In these uncertain times, you may have been thinking about taking out some form of protection to ensure that your bills and loved ones will be covered in the event of the unexpected occurring. However, you may also be confused by the various types of protection available and could be questioning exactly what cover you need. You can choose from critical illness cover, income protection and life cover or more than one of these, but what’s the difference?
A quick summary of the various types of cover…
Life cover – you can choose from life insurance and life assurance policies. Life insurance has a fixed term and pays out a tax-free lump sum in the event of your death during the term of the policy. The term is typically from 10 to 25 years (you usually get to choose the term). Life assurance covers you for the rest of your life and doesn’t expire on a fixed date.
Critical illness cover – an insurance policy that pays out a tax-free lump sum if you are diagnosed with a serious illness covered by your policy. It typically covers conditions such as heart attack or stroke, major cancers, loss of limbs, multiple sclerosis and Parkinson’s. Some policies will also cover Alzheimer’s disease.
Income protection – an insurance policy offering long-term sick pay for a fixed term of your choice, covering part of your income if you fall ill or have an accident that prevents you from working. Payments are received on a monthly basis and the policy will cover you until you can work again or until retirement or for a set period of time i.e. one year or two years. This is usually after a waiting period or deferment period which would be after your sick pay or until you deem it impossible to pay your bills.
What form of protection do you need?
How do you know which type of cover is right for you? We answer your commonly asked questions to help you decide…
Can you obtain income protection against the risk of redundancy?
Yes, there are a couple of providers that are doing redundancy cover but it’s expensive and some schemes may not cover you in extreme situations, like the pandemic. Unless you have a very niché profession, if you are made redundant you can choose whether you want to do something else to earn money. By comparison, if you are ill or injured, you have no choice and can’t work.
How much of your income is covered by income protection policies?
The maximum is usually 75 per cent of your salary on a group scheme where your employer has a plan for multiple employees. It’s typically between 50 to 70 per cent of your salary.
Is it worth having both life and critical illness cover?
It depends on personal circumstances. A lot of people receive sick pay through their employers, so they are quite happy to be covered for six months or a year and take the risk.
Critical illness cover is more expensive as you are more likely to claim on the policy, whereas life cover is relatively inexpensive. The benefit of having both types of cover is that you would get a lump sum and have your mortgage paid off, but how will your other bills get paid? Having a house with no mortgage on it and having money in the bank can significantly affect Universal Credit claims. If you have a certain amount in the bank, disability and living allowances can be affected. In an ideal world though, you would have both.
Incidentally, if you are considering life or critical illness cover, you can have the option of it paying you a monthly income for an amount of your choice if you do need to claim. ‘You can have this paid every month for a period of your choice, which for example could be 25 years or your anticipated retirement age,’ says MB Associates’ Protection adviser Nick Carter.
Are both types of cover more likely to be suitable for an older person?
It depends on the client. At MB Associates, we have a conversation with the client about their personal situation and try to find out what’s important to them and then make our recommendations.
What type of person should consider having income protection?
Anyone only entitled to Statutory Sick Pay (SSP), which is currently £96.35 per week, should consider it, as few of us could live on that. If you are a sole trader or self-employed it’s very important.
Less than 10 per cent of people in the UK cover their income but at least 26 per cent cover their mobile phone. Even if you don’t have a mortgage, you might be a single person living on your own in a rented flat and have rent, a credit card bill, a loan and council tax to pay. You still have to pay those bills even if your income stops. Even if you live at home with your parents, you still have bills. You might have a car on finance, a mobile phone and Internet costs.
What are some of the options you can have in relation to critical illness cover?
You can choose a higher level of cover if you wish. Some policies cover around 41 illnesses, whereas Legal & General has a policy that covers over 90 conditions and it is a very comprehensive form of cover. It depends how much you want to pay.
Are critical illness policies more expensive for anyone with a pre-existing medical condition?
It depends very much on what the condition is. Some conditions will cost more. With some, you may find you can’t get cover. Diabetics aren’t able to have critical illness cover for instance. They can get life insurance at a higher premium. If you have a condition that’s already at a critical stage, like cancer, the chances are you will be declined.
Is there a certain period of time after taking out the policy before the cover becomes effective?
Not with critical illness and life cover. As soon as you take the policy out you are covered. With income protection, you choose the amount of time before you want the cover to start. This is usually based on your sick pay or how long you would be able to survive financially without actually making a claim. The longer you can go before you’d want the cover to be effective the cheaper the premium. You may choose to start cover after 90 or 120 days.
General protection advice
Look at your situation and how you would fare if you didn’t have protection. If you develop a serious illness, have a heart attack or suffer from another critical illness, or if you are in an accident and can’t work, the last thing you want to worry about is your finances. You want to focus on your health. The pandemic has made more people think carefully about their health.
If you are made redundant, and you are fit and well, you can hopefully find other work. However, if you are physically unable to work due to illness or injury, that’s very different. This is why income protection is so important.
In 2020, there were insurance providers who paid out millions of pounds for Covid-related claims.
For further advice on the best type of financial protection for you, or for a review of your existing financial protection cover, please contact Nick Carter, Protection Specialist at MB Associates, on 020 8652 5240 or email firstname.lastname@example.org