What insurance do I need?

A common question our clients ask us is “What insurance do I need?”. The answer to that question is different for every client and requires us to delve deeper into their situation and objectives. What are they trying to protect against? What level of cover do they need? Do they already have appropriate cover through work?

In this Five with Five blogpost, we will cover five types of Protection explaining what they are and when they could be used.

• Life Insurance (Term Assurance)

Life insurance provides a cash lump sum if you are to pass away during the term of the cover. You can select a cover amount at the start of the policy, and this can stay level, increase or decrease over the term of the policy. Uses for Level cover can include protecting your family’s standard of living if you were to pass away by providing a lump sum that is set out at the policy start date or it could be used to cover the liability on an interest only mortgage. We often see this being used to insure against an inheritance tax bill in the short term, whilst longer term planning is brought into place to help reduce your Estate’s Inheritance Tax liability – you can read more about this in our other blog post HERE.

Should you wish to try and protect this lump sum against inflation, you can take out an increasing policy that will increase by a set rate each year e.g., RPI. Decreasing cover can be used to provide a lump sum that can be used to pay off a repayment mortgage as the cover amount will decrease in line with the remaining mortgage.

There are numerous other options of Term Assurance such as:

• Convertible policies – which allows the policy to be converted into an endowment or Whole of Life policy without the need for medical underwriting
• Renewable policies – but you have the flexibility to renew the policy at the end of the term, again, without medical underwriting
• Gift Inter Vivos policies – which are generally used to cover an Inheritance Tax liability for a gift over the Nil Rate Band of £325,000 (2022/23)
• Term 100 policy – which is life insurance that lasts 100 years.

• Critical Illness

Critical Illness cover provides you with a cash lump sum should you be diagnosed with certain illnesses. This can help with paying for any medical expenses, clearing any debts or just to support your standard of living. Critical Illness cover is commonly combined with Life Insurance to provide full cover for any accident or illness that may severely impact a family’s financial situation.

Most Critical Illness plans have varying levels of illnesses and definitions of cover and do not cover pre-existing conditions, so it is important to ensure the plan is right for you.

• Family Income Benefit

Family Income Benefit is similar to term assurance but rather than a cash lump sum being paid out, a monthly income is paid to your family upon passing. It is similar to decreasing term assurance as the further into the policy you get, the total income you will receive decreases – this makes it a cheaper option. These monthly payments are tax free and will continue until the end of the term. This is most commonly used when a household relies solely on one individual’s income and would be in financial difficulty should that income cease through death.

• Income Protection

Income Protection provides you with a regular (usually monthly) payment that replaces your income should you be unable to work due to illness or accident. The payments would end if you returned to work, reach the end of the term of the policy or pass away. Most insurers will only pay up to 60% of your salary so that you are encouraged to return to work. There is also a deferred period built into the policy of 4, 13, 26 or 52 weeks before any payment is made which can be used to help manage the costs of the policy – the longer the deferred period, the cheaper the cover.

For Income Protection, it’s important to choose your provider carefully as they all have different definitions of what they mean by incapacity to work – in order for a successful pay out, you need to meet this definition.  Some may define incapacity as total inability to perform any part of your duties, for example, if an administrator could still pick up a phone then the insurance company may argue they do not meet this definition. Others may define incapacity as the inability to perform your main duties, for example, if the same employee could no longer come to the office to file post or use a computer, then this would meet the definition of ‘main duties’ and a claim would be successful.

• Whole of Life

Whole of Life insurance will pay out a lump sum to your family when you pass away. Typically, this type of insurance is expensive because it is guaranteed to pay out as there is no term, it is simply upon passing. This cover is often used to insure against an inheritance tax bill whilst longer term planning is brought into place to help reduce your Estate’s Inheritance Tax liability. Some policies include a regular review at which time the premiums may increase or the sum assured be reduced.

These are just some of the types of protection that are available and as always, the right type of cover is dependant of your situation. It our job to consider this alongside your wider assets, potential risk to you or your family, future goals and future planning opportunities to ensure that you have the right type and level of cover, at an appropriate premium, to protect your family/Estate.

It is important to remember that Life Assurance plans typically have no cash in value at any time and cover will cease at the end of term. If premiums stop, then cover will lapse.  Most plans will not cover pre-existing conditions, so it is important to disclose all information accurately and honestly to ensure coverage of any future claim is not impacted.

If this policy is to replace any existing policy offering the same type / level of cover, you must not cancel any existing policy until the new policy is in force.

If you would like further information on anything covered in this article, please get in touch via the contact page.

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