The current situation with the coronavirus has made many people realise the importance of protection, as no one knows what’s going to happen to them. As a result they are now reviewing their insurance policies. But what and how much cover do we need?
To start ask yourself, if you were either suddenly to die or be diagnosed with an illness which meant you were unable to work again, how much money would your family need to maintain their standard of living? Maybe you would only need to be covered for a particular period of time, for example until the children were 18 or 21 years of age (or whatever age you feel is appropriate).
If you have life insurance for your mortgage you can eliminate this expense from your answer. Once you have confirmed what is required, you might insure for a lump sum that would be able to repay debts, or fund a certain level of income. One of my favourite (and often more cost-effective) insurance policies is Family Income Benefit. This works instead on the principle that you will be paid an income on death for the remainder of a selected term. This means that each year that you survive, the total that is paid out will reduce. For example if you were to cover yourself for £1,000 per month for twenty years, and you died at the end of year two, it would pay out £1,000pm for the remaining eighteen years (a total of £216,000). If you died in year ten it would only pay out about £120,000 in total over the next ten years. Because the liability for the insurance company decreases over time, the premiums can be lower, so it can be a more cost effective way of providing cover.
When considering the financial impact of illness, there are two main types of sickness cover: Critical Illness and Income Replacement. Ideally you should consider having both. Critical Illness insurance pays out a lump sum if you suffer one of a predefined list of conditions. Income Replacement will pay out an ongoing income if you were unable to work due to sickness after a pre-agreed period of time.
Whilst Income Replacement policies can only replace a proportion of your income, you are covered for all illness that causes you to be unable to work. Critical Illnesses policies are more specific. Stress and back pain are not considered to be a Critical Illness although they’re often a reason individuals are unable to work. Critical Illness policies frequently include Permanent Disability, however you usually have to be off for two years before you can make a claim for this. You may also need to pay an additional premium for this cover.
If you would like to review your cover, why not contact us and arrange a free without obligation consultation.
Allowances, limits and thresholds correct at the time of writing, but are subject to change in the future. Please confirm the current position before taking any action
