Life
Insurance
Intro
What is life insurance?
What types of cover are available? Term insurance
Critical illness insurance Income protection Family income benefi t
The impact of medical conditions and other factors The value of advice
3 4 5 6 7 9 11 12 13
Contents
Written by Jill Insley Produced for Guardian Consumer Offers and Services to a brief agreed with London & Country Mortgages Funded by London & Country Mortgages. All editorial overseen and controlled by the Guardian. For editorial guidelines visit: guardian.co.uk/sponsored-content
You spend all your life trying to keep the people you love safe and secure. The good news is that there’s no need to stop doing that even if you fall ill or die.
No one likes to think about this happening, but one way to feel slightly better about ill health and death is to minimise the impact they have on our lives and on those of the people we love — to make them financially secure even if you are not able to provide for them yourself.
There are several kinds of insurance that can help with this, including policies that pay out if you die or develop a life-threatening illness, or that replace all or part of your income if you fall ill or are injured and unable to work.
However, the number of products and the often confusing rules and regulations applying to them, can be off -putting. To make matters worse, they frequently change. Next year, for example, the rules relating to gender and life insurance contracts will change, meaning that women could end up having to pay more for the same amount of insurance cover.
Even if you already have insurance, you might need to reassess whether it is still right for you. You might have got married or had children since you first bought cover, stopped smoking or borrowed money that needs paying back whether you are earning or not. All of these things can affect the amount of cover you need and the price you pay for it.
By checking the policies you have, you could even save money: the cost of insurance has come down over the years as insurers realised that viruses such as HIV, and conditions such as AIDS, are aff ecting fewer people than previously predicted.
Over the next few pages, this guide explains the different types of insurance available and when you should consider buying them. It will point out where to fi nd help and advice if you don’t feel confi dent about making these decisions by yourself, or you feel you may be refused cover for health or other reasons.
Intro
Even if you already
have insurance, you
might need to reassess
whether it is still
right for you
Life insurance pays out a lump sum or, in some cases, a regular income if you die during the term of the policy.
It’s a grim subject: no one wants to dwell on getting ill or dying, but if you have a family it is important to ensure they have enough money to live on if you are no longer around.
Most people believe the state will support them if they have no source of income, but the amounts paid out are probably much smaller than you expect. Someone aged 25 or over receiving Jobseekers Allowance, for example, will get just £67.50 per week during the 2011/12 tax year. Out of that they will have to pay for utility bills, food, clothes and anything else they need to buy, such as the television licence and petrol.
If you have a mortgage, your family may qualify for help with the interest payments – a benefit called Support for Mortgage Interest – on up to £200,000 of your mortgage. Even then the state will currently only give you suffi cient money to pay for interest charged at 3.63%. If your interest rate is higher, you will have to fi nd the extra yourself.
Likewise if you rent a home, your family may qualify for housing benefi t to help with the cost. But this is now subject to strict limits and many people are struggling to fi nd rental property cheap enough to match the lower levels. The government has also introduced a new rule which means people under the age of 35 must share a property to qualify for local housing allowance. To find out more about the benefits your family could be entitled to, visit www.directgov.co.uk.
You may have enough savings to tide your family over. But if you are worried they could run out of money, or already know that they will, buying insurance is an immediate way to ensure they are protected.
What is life insurance?
Most people believe the
state will support them
if they have no source
of income, but the
amounts paid out are
probably much smaller
than you expect
Every family has different fi nancial needs: some might need a lump sum to pay off the mortgage, others might need a regular income to pay for household bills and childcare.
People who don’t have children or other dependents might not need life insurance, but they could benefit from other types of cover to protect themselves if they fall ill or are injured and are unable to earn income for a while.
A range of insurance policies has been developed to meet these varying needs and, depending on your circumstances, you may want to buy just one, or a combination of cover to ensure your family’s fi nances are secure.
These include term insurance, critical illness cover, family income benefit and income protection. Over the following pages, we will explain what these policies do and when you should consider them.
What types of cover
are available?
People who don’t
have children or other
dependents might not
need life insurance, but
they could benefit from
other types of cover
Term insurance is the most basic, and popular, life insurance. It pays out a lump sum if you die within a set period of time chosen by you — known as the “term”. These policies come in two types. Level term pays out the same amount of money throughout the term. You might use this to provide a lump sum of cash to pay off outstanding debts and make sure there is a safety net for your family if they fall short of income, or to provide money to top up income coming into the household.
Level term insurance can be relatively cheap. A 30-year-old man can buy cover worth £100,000 over 25 years for just over £6 a month. Decreasing term life insurance is designed to run alongside a repayment mortgage. The cover reduces in line with the size of the mortgage, so if you die after you have paid off half your mortgage, the policy will pay out the right amount to clear the rest of the loan. Because the cover decreases as time passes, the cost of this type of insurance is slightly less than level term insurance. A man buying cover to run alongside a £100,000 repayment mortgage over 25 years would pay £5.38 a month.
Women currently pay less for life insurance, because statistically they are likely to live longer than men. However, a recent court case in Europe decided that it was unfair to underwrite insurance on the basis of gender, so from December 2012, the cost of life insurance for men and women will be equalised.
This is good news for men, as the price of life insurance is likely to come down slightly for them. But women will inevitably end up paying more, so if they are planning to buy life cover, it would be a good idea to do so before the price rises kick in.
Some policies offer an additional benefit called terminal illness cover: this means the policy will pay out if you are diagnosed with a terminal illness and given less than 12 months to live. The early payout means you can sort out your fi nances and make whatever adaptations you need to your home to make life easier. However, the insurer may specify that to qualify for this payout the policy must have at least 18 months left to run.
Term insurance
Use this to provide
a lump sum of cash
to pay off outstanding
debts and make sure
there is a safety net for
your family if they fall
short of income
One in four women and one in five men reportedly suffer a serious illness before retirement, often leaving them unable to work for a long period of time, if ever again. Critical illness insurance is designed to remove the financial pressures caused by serious illnesses or total disability by providing you with a tax free lump sum of money to pay off debts or meet household bills, make necessary adaptations to your home or spend time recuperating. This insurance is suitable for everyone — even if they don’t have dependents. If keeping costs down is a priority, you can even take out just enough critical illness cover to pay off the mortgage. The cover pays out if you are diagnosed with any one of a wide range of illnesses as specifi ed in the policy, and then survive for at least 14 days after diagnosis. These typically include seven main conditions: certain (but not all) types of cancer, heart attack, coronary artery bypass, stroke, kidney failure, major organ transplant and multiple sclerosis.
The cost is about £16.50 for a man aged 30 wanting £100,000 of cover over 25 years. But it’s important to remember that with critical illness insurance, possibly more than any other type of policy, you get what you pay for. If you opt for a cheap policy the range of illnesses covered is likely to be very restricted. But if you are prepared to pay a bit more, blindness, a greater number of types of cancer and heart attack and total permanent disability can also be covered.
The Association of British Insurers (ABI), the trade association for 96% of insurance companies, has drawn up a set of “best practice” guidelines for critical illness insurance. But these stipulate that policies should cover just three conditions as standard: • cancer, excluding less advanced cases,
• heart attack, of specifi ed severity, and • stroke, resulting in permanent symptoms.
You can fi nd the guidelines on the ABI website (www.abi.org.uk). In practice, most policies cover a far bigger number of illnesses. But even those that cover more than 30 conditions may exclude some that you consider serious or life threatening, or that seem
Critical illness insurance
→
This insurance is suitable
for everyone — even
if they don’t have
dependents. If keeping
costs down is a priority,
you can even take out
just enough cover to pay
o≠ the mortgage
incredibly similar to other illnesses that are included in the policy. For example, while a policy might pay out on diagnosis of Alzheimer’s disease before a certain age, other forms of dementia could be excluded.
In the past, insurers have refused to meet claims when a policyholder has been diagnosed with cancer that has not metastasized. But now some will make partial payouts on diagnosis of a particular type of breast cancer – ductal carcinoma in situ if the policyholder needs a partial or total mastectomy, segmentectomy or lumpectomy. Likewise, some will pay out part of the full sum covered if the policyholder is diagnosed with prostate cancer, provided it meets several criteria, including having a Gleason score of between two and six.
A partial payout will not aff ect your ability to make a full claim if your are later diagnosed with one of the even more serious conditions specified in the policy.
So if you have a personal reason for wanting to include a particular condition on your critical illness policy, it is vital to check before buying, rather than face the disappointment of a rejected claim and the resulting fi nancial pressures at a time when you feel least ready to deal with them.
Income protection pays out a monthly tax free sum of cash if you are unable to work through illness or disability. It is arguably the most important cover you can buy, particularly if you are self employed. After all, if you can’t work, how will you pay for anything? You might qualify for state benefi ts, but these are likely to be worth less than your usual income.
You don’t even have to be in paid work to benefit from income protection. If you are raising children or looking after an elderly relative, this insurance could pay for someone to help out if you become too ill to carry out your normal role.
You might well be wondering why everyone doesn’t buy income protection if it’s so great? Well, your employer may already provide sick pay as an employee benefi t — you should check before proceeding with any purchase.
It is a good idea to tie in the commencement of income protection payments with the cessation of sick pay from your employer. There is a danger that the insurer will not pay the full amount of your claim otherwise, depending on how much sick pay you receive. Income protection is generally cheaper than critical illness insurance: someone wanting a 25 year policy which would replace half their £40,000 annual salary if they are unable to work could face a monthly premium of £13.
There are ways to reduce the cost still further. Income protection pays out after you have been signed off work for a pre-agreed period: the longer this period is, the cheaper the insurance premium.
The payments continue until a set date, usually your retirement age, but again you can cut the cost of premiums by opting for a shorter payment period.
The maximum level of cover you can buy is usually about half your current income (remember that you do not have to pay tax on this, so the sum could almost equal your usually salary if you are a higher rate tax payer). But if you think you could manage on less money, you could reduce premiums by opting for a lower level
Income protection
To cut costs you could
time the start of your
income protection
payout to fit in with
the cessation of any
sickness benefits paid
by your employer
of cover – perhaps just enough to cover a specifi c cost, such as the mortgage or childcare.
The most important thing to check for when buying an income protection policy is that it will pay out if you are unable to do your usual job through illness or disability. Some policies specify that they will only pay out if you are unable to do any job. So you could be earning £50,000 as a policeman and be unable to do your normal job because of a long term injury, but find that you policy will not pay out because the insurer deems you are still healthy enough to do a desk-bound job at a much lower salary.
Opting for the “own occupation” definition might make the policy more expensive, but it means you are much more likely to be able to claim successfully.
Family income benefi t pays a tax free, monthly income if the insured person dies during the term of the policy.
This is the lowest cost way to buy life insurance, because the potential payout decreases the further through the policy you get. Assuming you are 30 years old and you want to buy a policy designed to payout income of £36,000 a year or £3,000 a month until your new baby fi nishes university at the age of 21, you would have to pay about £15.44 a month. If you die at the end of the second year, your family will receive 19 x £36,000 in payments, or £684,000. But if you survive until your child is 18, you family will only get three £36,000 payments, or £108,000.
This might sound a bit unfair, but remember the resulting lower premium cost could make the difference between you being able to afford the insurance or not. And the £108,000 your family would receive if you die at the end of the 18th year of the policy should still be enough to enable your household to function normally and for your child to get through college.
You are also likely to be able to achieve a much higher annual income through this type of policy than level term insurance if you invested the proceeds of a payout to produce income. Assuming you invested the payout in an annuity at today’s rates to produce income, you would need about £550,000 to achieve a £36,000 annual income. A policy to produce this sum would cost a 30-year-old man about £28 a month over a 25 year term, based on current premium levels.
A family income benefi t policy can be a good compromise for a household living on a tight budget with specifi c spending needs.
Family income benefi t
This is the lowest
cost way to buy life
insurance, because
the potential payout
decreases the further
through the policy
you get
a £36,000 annual income. A policy to produce this sum would cost a 30-year-old man about £28 a month over a 25 year term, based on
A family income benefi t policy can be a good compromise for a household living on a tight budget with specifi c spending needs.
The price of life insurance is aff ected by several things:
Your age – The younger you are, the lower the premiums are,
because you are less likely to die. As the price stays the same throughout the life of the policy, it can make sense to buy term insurance early on, when it is cheap.
Health – If you have, or have had, any serious conditions, such as
diabetes or high blood pressure, your premiums will be higher. It is important to be honest about this when applying for insurance. If your insurer fi nds out you have omitted important information about your health that you knew about at the time of buying the policy, it will refuse any claim you make on it. Insurers will even refuse a claim if you do not disclose visiting a doctor with concerns about a condition, but have no diagnosis prior to buying a policy.
Your lifestyle – If you smoke or drink more than the recommended
maximum level of alcohol each week (21 units for men and 14 for women) insurers will charge you more for cover. However, if you have stopped smoking and been nicotine free for at least 12 months, it is worth checking to see if this will reduce your premium.
Guaranteed or reviewable cover – Some insurers sell policies
allowing them to review the premiums, typically every fi ve years. It might seem cheaper to start with, but it will inevitably cost more over the term of the policy and should be avoided. Always opt for guaranteed premiums that stay the same throughout the policy.
Your family’s health – If your relatives have a history of illnesses
and conditions which can be inherited, such as high blood pressure, certain cancers and heart problems, the insurers will charge you more and may even refuse to sell you cover.
Your occupation and hobbies – If the insurer thinks these are
dangerous and could result in your death, it will charge you more for insurance and could refuse you cover altogether. High risk occupations include the armed forces, pilots, fi shermen and people working in the gas and oil industries. High risk hobbies include mountaineering, parachuting and bungee jumping and horse riding.
The impact of medical
conditions and other factors
If your insurer finds
out you have omitted
important information
about your health that
you knew about at
the time of buying the
policy, it will refuse any
claim you make
Buying life insurance might seem as simple as comparing a list of policies and selecting the cheapest, but as this guide hopefully demonstrates, there is much more to consider than price. Diff erent policies off er varying levels of cover, terms, waiting periods before you can make a claim and diff erent types of payout.
It is particularly di∞ cult to work out which critical illness insurance policy is best for your needs. Each operates in a slightly diff erent way and covers a varying range of illnesses and conditions. People sometimes only learn they are not covered for a particular illness when they have been diagnosed with it and try to make a claim. If you have any doubts or queries about what you need, even if it’s just a matter of working out how much cover to buy, you should seek help from a fi nancial adviser. If your interest in insurance has been spurred by the purchase of a new house or remortgaging, your mortgage broker – such as London & Country Mortgages – may also be able to off er advice and sell you life insurance.
Alternatively, consider asking an independent fi nancial adviser for help. These are specialist advisers able to provide information about all the insurance products (and other fi nancial products) in the market. You can fi nd a regulated adviser in your area by visiting the IFA Promotion website (www.unbiased.co.uk). But if you want one who has attained the highest level of
qualifi cations, look for those with further professional qualifi cations with the Personal Finance Society (www.fi ndanadviser.org) or the Institute of Financial Planning (www.fi nancialplanning.org.uk). You may be concerned that an independent adviser would charge more than you are prepared to pay. But remember that you should be off ered a choice of payment methods: either opt for the adviser to be paid in commission by the insurance company, or you can pay a fee yourself and have the commission rebated back to you. In either case, the advice you receive may save you more money than the advice actually costs. And it could be worth its weight in gold if you need to claim.
The value of advice
If you have any doubts
or queries about what
you need, even if it’s
just a matter of working
out how much cover to
buy, you should seek
help from an adviser
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