Money: Take cover for life’s big surprises

NO-ONE knows what is round the corner. Yet while planning for the unknown makes sense, still far too few take the right step. Whether it is an illness, disability or death that finds a household struggling financially, having the right protection in place can ensure a home and lifestyle are protected.

More people insure their pets and mobile phones than their health and income. Yet, if the unexpected should strike, it could be a struggle to meet financial liabilities from mortgages to credit card payments, let alone food, utilities, council tax and petrol.

In the most recent survey undertaken by Scottish Widows, material goods were rated as more important than financial security: 75 per cent said broadband was essential to day-to-day living, but just 29 per cent said ensuring their financial security if they were unable to work was an essential.

There are several forms of protection to consider in conjunction with an experienced independent financial adviser:

• Life cover upon death pays a lump sum or an income for the rest of the term

• Income protection pays a proportion of earnings if unable to work through an accident or illness. Vital for the self-employed and for those with few savings or a partner’s income to fall back on. Without it, your lifestyle could be at risk

• Critical illness (CI) cover pays a lump sum if you are diagnosed with an illness and survive for at least 14 days

• Unemployment cover for those concerned that they might lose their job and may then struggle financially

“Protection is an area that has been forgotten about over the years but is the bedrock of all life insurance,” says Max Horne of the Max Horne Group. “Anyone who has a debt to someone, whether it is a mortgage, bank loan, even the debt of not living long enough to complete a career, still needs to be covered by the individual dying too soon.”

It is too easy to realise that thousands each year become sick and hurt to such an extent that they cannot earn a living. They have to rely on state handouts which are now under intense pressure.

“If you die and deprive your family of the main bread winner, it is the ultimate financial disaster,” warns Horne. “Never mind not having enough growth on an investment or pension fund for a few years, it makes a difference if you did not have the pension fund in the first place. Protection is a hugely neglected area.”

For providers, he favours Aviva and Legal & General but dislikes Bright Grey as it “appears to want to only insure the top 2 per cent of healthy lives to the exclusion of everyone else.”

Start by identifying your main financial liabilities, which are typically a mortgage and the cost of raising children, suggests Michael Jackson of Kelvin Financial Planning. The options include a tax-free lump sum or a tax-free income. “Good practice would include considering an appropriate trust to ensure death benefits do not form part of the deceased’s estate,” tips Jackson.

He advises creating a lifetime cashflow illustration which takes income and expenditure into account – and then check how an early death or illness possibilities would affect it. He can then calculate income or lump sum shortfalls and recommend appropriate levels of insurance.

“In reality, long-term income protection should be the first financial product that most working age people consider,” says Matthew Robbins at Edinburgh Investment Consultants. He advises people not to be put off by the premiums as they reflect the higher potential for claims and high levels of cover that can be provided when compared to other forms of protection.

LV= offers a unique plan which combines income protection/accident, sickness and unemployment cover, reveals Jeffrey Deans of Save & Invest. He says Legal & General have “family-friendly” benefits aimed at easing financial burdens should children be diagnosed with a serious illness.

The ability to guarantee a level of cover at the outset, regardless of a claimant’s level of income in the future, can be a significant advantage as it is now commonplace to undergo career breaks or take a change in career direction in addition to having children. PruProtect (Prudential) is able to offer this facility.

When choosing income cover, ensure it protects your specific occupation, not just the ability to undertake any job. Otherwise a dentist who could manage garden work would have no payout but their lifestyle would be totally different.

CI cover was traditionally offered on an “all or nothing” basis but today there are many alternatives. PruProtect, for example, provides percentage payments based upon the severity of a claim.

It can also cover far more critical illnesses which, instead of an increased premium, can equate to an “all or something” basis of cover.

Ensure that any CI policy is comprehensive and does not restrict unnecessarily. Take it as a “stand alone policy and not combined with life assurance as once a combined policy has paid out on CI, then the life element ceases,” warns Graeme Robertson of Chase de Vere.

Insurers have been offering policies for some years now which reward policyholders who seek a fit and healthy lifestyle. As the chances of a claim are reduced, so underwriters offer ongoing premium discounts and savings on health-orientated products. PruProtect offer this through its Vitality programme which is “proving to be a very popular feature with many of my clients,” says Robbins.

Scottish Provident is “very reasonably priced with a more than adequate range of protection variations,” adds Jackson. He says that a local presence is useful when there is a need for a high level of service.

If your current policy is with an insurer closed to new business, consider switching as they have little incentive to provide a good service. Many have reduced staffing in key areas so that response times are poor.