Family Protection
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Family Protection
All about family protection with Andrew Clissold.
Why is mortgage or life protection so important?
If you were to die and you’ve got a mortgage, that debt is left to the beneficiaries of your estate – that might be your partner or children. They then have the responsibility to continue paying the debt.
It might be that there’s now only one income coming into the household – so is that mortgage going to be affordable on one wage? By protecting the mortgage with some life insurance, the people that you leave behind effectively won’t have to worry about having a roof over their heads. That cost is gone – they just need to cover the other bills and living expenses.
For some people, it might be that your estate goes to somebody outside of your family. You might choose to leave it to a friend – but can they afford to pay that mortgage on top of their existing outgoings? Life insurance is really about making sure that your debt is not a concern for anyone should you pass away.
Why do we need life insurance or life assurance?
It covers your mortgage, other debts, can be used to leave money for loved ones, and for inheritance tax planning. One area where you may want to insure your life is to make sure the people you leave behind have a roof over their head and don’t have that financial burden.
The other reason people may have life insurance is to leave a legacy. They may want to leave a lump sum of money to make sure their loved ones are comfortable, or to set their children up for life. That might be a house deposit, or to help get them started in a business or education.
You could give your family or partner a lump sum of money to replace your income. So whilst life insurance can’t bring someone back, it can help family and loved ones financially and alleviate one worry at a very uncertain time.
Do I need critical illness cover? What is this and how does it differ from life insurance?
Critical illness cover will provide you with a lump sum of money – it’s similar to life insurance in that respect, you’ll get a lump sum. The difference is that critical illness will pay out if you are diagnosed with a potentially life-changing illness.
Each provider will have their own view on what that looks like – it’s wide and varied – but put simply these are things like a heart attack, stroke or cancer, loss of limbs or loss of sight.
The main difference from life insurance is that critical illness pays out whilst you’re still alive. So if you suffer a life changing illness or accident, you would get a lump sum of money. It might be that you cover yourself to pay off the mortgage. It might just provide a lump sum to use towards medical bills or allow you not to work for a while while you recover.
It’s important to think about what you may need the money for. Strangely enough, one provider researched what people spent their critical illness payment on – and number one or two on the list was to buy a conservatory! So it can be used literally for anything.
What is income protection?
It’s an insurance policy to protect your income. It will pay a percentage of your income tax-free. It varies with different providers, but normally it’s up to 60% of your gross income. That would be paid out if you can’t work due to an accident or sickness.
It doesn’t necessarily pay out for redundancy. There are separate policies that you can get for redundancy cover.
Often we see people get sick pay arrangements through work – but that’s varied. It’s important to seek independent financial advice to make sure the policy is set up correctly due to HMRC rules. The policy can’t pay out whilst you’re still receiving pay, and you can’t be earning more than what you currently earn.
The aim is to replace your income but not let you be better off than if you were at work. Independent advice makes sure you’re not insuring yourself for something that wouldn’t pay out, or where you are overpaying for the plan.
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How does family income benefit work?
Similar to life insurance, family income benefit pays out on death, but rather than providing a lump sum of money it pays out monthly for a period of time. It may pay £2,000 a month for 20 years, for example.
Effectively what you’re doing is trying to replace someone’s income. It can be cheaper than normal life insurance where you receive a lump sum, because the money is getting paid over a period of time. People typically insure themselves for somebody’s wage or to cover the mortgage expenses going forwards.
What is term assurance and how does this work?
Term assurance is when an insurance policy runs for a specified length of time – for example 30 years because that’s how long your mortgage is. At the end of the term the premiums and the plan stop.
There’s typically no payout at the end of the policy. If you survive till the end of the policy – which hopefully you will – it stops. There’s no financial gain at the end. There are some old life insurance policies with an investment element that give a sum at the end if you survive, but these haven’t been sold for many years now.
What is whole-of-life assurance?
This would run for the whole of someone’s life. People normally choose this to leave money for their loved ones. They want to guarantee that there’s an amount of money to go to their children or grandchildren.
A whole-of-life insurance policy runs for your whole life and pays out on death whenever that may be. This can also be used for inheritance tax planning or to cover funeral costs. It’s normally more expensive than a term insurance policy.
It’s important to choose the right option for you, your circumstances and what you’re trying to achieve.
Can you combine policies?
You can’t necessarily combine existing policies. But if you’re taking out new insurance, you could combine your life insurance, critical illness and income protection, for example, under one insurer. You would have one plan and you know where all your insurances lie.
A big benefit of this is that the provider often gives a discount when you’re holding multiple products under them. I would really stress the importance of seeking advice, because different insurers offer different levels of cover.
With critical illness, some providers cover more conditions than others. So when looking at combining policies, there might be a multi-product discount – but it’s more important to make sure you are covered for what you want to be covered for.
Whether having them all under one roof is the right thing is subject to each individual’s circumstances.
How much should I budget for mortgage protection?
Something’s always better than nothing. It comes down to your affordability. In an ideal world, we would cover the mortgage with life insurance and critical illness cover. Income protection would ideally cover the mortgage plus other outgoings or debts that you have.
If it starts getting too expensive, we start looking at ways to reduce the premium. Things that affect the cost include your age, the amount you’re insured for and, if it’s a term policy, how long it runs for. We can adjust those factors, making sure firstly that it’s suitable and secondly that it’s affordable.
If it is all out of budget, we’d look at the real key areas and what other finances you have available such as savings and pensions. That might lead us in a certain direction.
I can’t give an exact figure. It really depends how much cover you need. But definitely you should work through the ins and outs of what is really important to you with a professional advisor.
How can a financial advisor help?
We will help you make sure you’ve got sufficient cover if the worst happens. We tailor the policies to your personal circumstances, so you’re not overpaying for them. Plus, if the worst happens, we can help your family navigate their new financial position and advise what to do with that lump sum of money, to stretch it out as long as possible.
The final point I would add is to make sure that you have cover. Death, critical illness or not being able to work comes with its own stresses and emotions. Having cover in place can at least reduce one of those stresses – the financial implications of those events happening. So get cover and let us make sure it’s right for you.
Your home may be repossessed if you do not keep up with your mortgage repayments.