Nobody likes to think about bad things happening to them, so it should probably not be a surprise that many people fail to take out protection insurance that would help them or their family in the case of accident, illness or death.
When people consider this kind of cover they typically look to life insurance, but cover that can protect you if you have an accident, or fall ill, is also an important thing to consider.
Protection insurance has been criticised for its failings over the years, but a good policy performs a vital service to those hit by bad news. This is Money has identified the most common kinds of cover and how they work.
Peace of mind insurance: Cover that will pay out if you have an accident, fall ill, or die will help your family
This is the most common and straightforward type of financial protection and pays a lump sum if you die.
There are different kinds of life insurance, with some providing cover until you die, while others are for a set period such as the duration of a mortgage, or any term you decide to set.
It can cost a few pounds a month, but is often more. The final sum depends on your age, health and the type of policy.
Life cover used to be more expensive for men, but after the EU Gender Directive came into force, insurers are no longer allowed to base their pricing on gender. This means men and women should pay the same for all types of financial protection.
The general rule of thumb is that those who own a mortgaged property with a partner, especially if they have children, should get life cover with the aim of clearing their home loan if they die. This means the surviving partner and any children can remain in the house and will not have to worry about paying the mortgage.
To this end there are different types of life cover:
Level term insurance – A set sum for a set period of time: It can be taken out in conjunction with your mortgage term, or a planned working life, and will pay out a set sum if you die during that period.
Decreasing term insurance – a declining sum for a set period of time: usually used with a repayment mortgage, this reflects the fact that the outstanding debt will fall over time. It is cheaper than level term insurance.
Whole of life insurance – a policy that lasts for the rest of your life: This kind of policy pays out a set sum whenever you die. Policies are usually made up of an insurance element and an investment element. This is often used to cover an expected inheritance tax bill. This is the most expensive form of life insurance.
Joint and individual policies: Life insurance policies can be joint or individual. It is worth comparing costs on both, as separate policies can work out cheaper for a couple – or only a little more expensive – and if something terrible happens and you both die they will both pay out.
In contrast, a joint policy will typically only deliver one payout on the first person’s death.
How to find the best life insurance
It’s important when buying life insurance to make sure you get the right high quality policy and the best price.
The cost of life insurance can vary substantially due to the way commission is charged on policies.
For many years This is Money has recommended that the cheapest way to get a policy is with a broker called Cavendish Online. It charges a one-off £25 fee and then 100 per cent of the commission it gets is reinvested back into policies to bring down premiums.
This is Money has now joined up with Cavendish Online to offer this service to our readers. There is also two other cost-effective routes available for those who may need some help, offering either guidance or full advice.
Other things to watch out for
Beware ‘low-start’ policies that start with low premiums that then rise over time, these can end up more expensive over the whole life of the policy
Reviewable premiums will only be set for a certain term and will most likely increase on a date in the future when they are reviewed.
If you write a life insurance policy in trust it falls outside of your estate, won’t deliver an inheritance tax bill, and will be paid directly to the person you specify it should go to without the need to wait for probate. Providers or advisers will be able to help you do this.
How much do you need? You will probably want to cover any mortgage, pay for a funeral, and also leave some money to help with living expenses, but the more cover you take out the pricier it will be. If you think you will end up moving home to a more expensive property as life progresses, it may be worth buying extra cover earlier on, as it tends to be cheaper the younger you are.
One key thing to consider when taking out life cover is what arrangements you already have in place. For example, employers can offer some for of death in service benefit, which may be a multiple of your salary. Pension pots built up can also be passed on to your family if you die.
Check with your employer and pension provider what benefits you have before assessing the level of cover that you need.
For help on life insurance you should either speak to an independent financial adviser, or a life insurance specialist. If you are happy arranging cover yourself, the cheapest way to do it is through an online broker.
Prepare for the worst: Life cover and family income benefit will pay out in the event of the death of one or both parents.
FAMILY INCOME BENEFIT
Similar to life cover but instead of a lump sum it pays a regular income should you die.
These are suitable for people with young families who want to ensure their children are covered in the event of the loss of one or both parents before they are financially independent.
Critical illness cover can also be added that would produce an income in the event one member is diagnosed with a serious illness.
A typical policy might be taken out by parents with young children that would provide an income until the end of a 20 year term should a parent die within that timeframe.
PRIVATE MEDICAL INSURANCE
Private medical insurance will cover the cost of specialists, surgery, accommodation and nursing bills in a private hospital, or in a private ward in an NHS hospital, drugs and X-rays.
You will get better facilities, tastier food and a private room, often with a phone and television.
Generally, policies do not cover the treatment of long-term illnesses that cannot be cured, such as asthma, diabetes or multiple sclerosis, or pre-existing medical conditions.
This means you can’t buy medical insurance today for an operation you know you will need in a few months.
Policies generally refuse to pay for treating conditions like alcoholism/drug abuse, dental treatment (although this is sold separately), HIV/AIDS, infertility, normal pregnancy or cosmetic surgery.
Some insurers will accept new customers at any age, others have an age limit. But the older you are, the more expensive it is. This means it tends to price people out of the product just when they need it most.
You will need to decide what sort of cover you want. There are a number of things you will have to consider.
- What should you consider when taking out PMI?
- How much do you want to spend?
- Do you want to pay for part of your treatment?
- Do you want your cover to include seeing a specialist and having diagnostic tests (for example, X-rays and blood tests) as an outpatient?
- Do you want a choice of hospitals, or would you be happy to have any treatment that you might need, in a hospital available from a limited range chosen by your insurance company?
- What am I not covered for?
One in five of us is likely to suffer a major illness before retirement. Critical illness insurance pays a tax-free lump sum if you are diagnosed with a range of illnesses, including cancer. In 2011 the average payout on a policy was £59,000.
Most providers cover between 40 and 50 types of illness, but it is vital you check the terms of a policy before you buy. Some cover only specific illnesses.
In the past, most providers would pay only if the illness was fully developed. But now about half of insurers pay at least something for an early-stage diagnosis.
For example, you could get between 20 per cent and 25 per cent of the sum assured if you were diagnosed with early-stage prostate cancer and between 12.5 per cent and 50 per cent for early-stage breast cancer.
This pays out if you can’t work due to illness or injury such as a back injury or stress.
Unlike critical illness insurance, it does not pay out a lump sum – instead it will provide a monthly income of up to 80 per cent of your salary until you are healthy enough to return to work or retire. It has never been a best-seller – partly because it is seen as complex and pays out smaller amounts each month instead of one big sum.
Some experts argue, however, that this is the best form of protection insurance if bought right.
It also has not helped that income protection has been lumped together with its inferior and notorious cousin, payment protection insurance, which has been widely mis-sold.
Before taking out income protection it is important to check what the policy covers. One of the key issues is whether the policy will pay if you cannot do your own job or if you cannot work at all.
The most basic income protection cover would be based on your ability to perform certain activities. This has a poor reputation.
There are a lot of income protection policies around, but it is essential to realise they are not all the same. Cheap cover may not deliver when you need it, so it is worth paying for a good policy.
Things to think about include:
- The level of monthly benefit required
- Whether cover is level or increases in line with the Retail Prices Index, or any other inflation measure
- Whether premiums are guaranteed to stay the same over the policy’s term or whether they are reviewable – usually every five or ten years
- At what age the policy should finish. Usually, it is between 60 and 65 to coincide with retirement although it is also possible to have short-term policies that only pay out for two years
- When the benefit should start to pay out in the event of a claim. This can be as early as four weeks and as long as 52 weeks. The earlier it pays out, the more expensive it is
Source: Daily Mail AU(Insurance)