Originially published on brewin.co.uk
The Covid-19 outbreak has made many of us think more carefully about protecting our family from financial difficulties. However, this isn’t just about having savings and investments to provide for the long term – it’s also about ensuring your loved ones are provided for should the worst happen.
Here, we consider what you need to know about the different types of financial protection, and which options may suit your needs. It’s important to seek advice from an adviser because options are unlikely to be clear cut. They can help you work out the right cover for your personal circumstances.
This will pay out a lump sum on death which could be used, for example, to pay off the mortgage and, ideally, provide a cash buffer to ensure your family’s financial security. As with any insurance policy, you will have to go through the underwriting process, and the cost will depend on your age and health.
Who’s it for?
If you have children or an outstanding mortgage you should consider a life insurance policy. You can choose from different types of life insurance policies.
Whole of life insurance: This is the most expensive type of cover, providing a guaranteed lump sum on death and, as its name suggests, covering you for your lifetime. It’s often used for inheritance tax planning. If you set up your policy in a trust, payment will be made to the trustees to distribute to the beneficiaries of that trust. As such, it stays outside your estate for IHT purposes.
Level term insurance: You choose the amount of cover needed, and how long the policy will run for. Typically, this is until the children are grown up, for example, and you have repaid the mortgage. If you die before the end of the term, the policy will pay out. If you outlive the policy term, you don’t usually get any money.
Decreasing term insurance: This insures you for a fixed period, such as 10 years, but the sum assured reduces over the length of the policy. This is more likely to be taken out to run alongside a mortgage term, for example.
It can be financially devastating if you are unable to work for a long period because of an accident or illness. Income protection is designed to provide you with a tax-free income if you are unable to work for a long period in these circumstances.
You can opt for this income to kick in after a certain period, such as three months, six or 12 months, and reduce premiums by opting for a longer period. When you need the income to start will depend on any cover provided by your employer, and your level of savings.
Check the terms carefully so you understand how the policy works, and when payments would begin. How much you pay for cover will depend on what level you choose, alongside your age, employment, and any health conditions.
Who’s it for?
This can be particularly valuable insurance for the self-employed who do not have any cover through their employer. If you are employed, you are entitled to 28 weeks of statutory sick pay, but you may find cover is extended beyond that. Anyone who wants to protect themselves against loss of income if they are unable to work, may want to invest in this cover.
Types of cover: You can choose from short-term and long-term cover. For example, short-term may pay an income over two years, until you are able to return to work, whereas long-term cover may run until retirement, or when the policy ends.
These policies pay out a lump sum on diagnosis of one of the critical illnesses covered by the plan – typically, policies cover core conditions such as heart attack, stroke and cancer. The lump sum may be used to pay off the mortgage, any other debts, or particular outgoings such as school fees, or to adapt living arrangements to the new circumstances.
However, critical illness policies can be expensive, and remember they only pay out for certain conditions, which will depend on the particular policy. You may buy a policy where premiums are guaranteed. However, it’s more likely that they will be reviewed every few years and rise over the policy term.
Who’s it for?
You may want to consider critical illness cover if you don’t have enough savings to cover you if you become seriously ill, or you don’t have an employee benefits package.
Family income benefit
This is an alternative to level term insurance, covering you for a set period of time. However, instead of a single lump sum, a regular, tax-free income is paid from when you die until the end of the policy. For example, if you take out a 20-year family income benefit policy and pass away after 10 years, it will pay out for a further 10 years.
Who’s it for?
This cover is suited to families who want to ensure an income for a set period rather than a lump sum payout for a surviving spouse. It’s considered a relatively inexpensive form of life cover, providing a regular, tax-free sum, if the insured dies. Cover may be set to last, for example, until children have reached age 21.
Private medical insurance
Many people have private medical insurance through their employment. This will pay for the cost of private healthcare, so you may, for example, speed up the process if you want to see a specialist for any reason than under the NHS. If you don’t have PMI cover through work, you can pay monthly or annual premiums for a policy. Beware that the majority of policies will not cover pre-existing medical conditions.
Who’s it for?
This depends on your budget, and how much you want this particular cover – it’s a personal choice. You are entitled to free treatment on the NHS, but you may want PMI if, for example, you would prefer to see a particular specialist, and use private hospitals.
Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.
The information contained in this publication is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.