How to protect yourself! – part 2 of 3 – Insurance companies and products
In part 1, we looked at the facts and figures surrounding this subject, employee and state benefits that may be available. Let’s now look at the insurance companies and start to look at products available to assist.
What about insurance companies, do they help?
February 2009, Government statistics showed that there were over 2 million incapacity claimants who were unable to work due to illness or injury.
In April 2012, Aviva revealed that it paid out 91% of it’s Income Protection claims in 2011, totalling nearly £30 million. The average age for the start of a claim is 44 years, and 45 per cent of those currently receiving benefit have been in claim for over 10 years. The longest lasting claim has been in payment for 36 years. (www.aviva.co.uk)
In comparison, one of the leading companies providing Critical Illness Cover, Friends Life, current claims statistics show that 52% of claims are made by males and 48% by females. With an average benefit provided of nearly £79,000 with £89.5 million paid out during 2011 (www.friendslife.co.uk)
What products are available?
There are a number of products available to meet various protection needs, several of these products can be dovetailed to provide comprehensive cover.
If sick and unable to work
As previously demonstrated, statistically there is a strong possibility of an individual suffering a long term illness, it could happen to anyone! Benefits from employer, if provided, do not last forever. Would the state benefits be enough? If you was to fall ill and be unable to work the essential items will still need to be paid for.
Income Protection
An Income Protection Policy (IPP) is designed to relieve the worry of meeting the essential expenditure or the need to use savings or get into debt.
How does IPP work?
IPP also known as Permanent Health Insurance provides a regular monthly income to the policyholder if they are unable to work due to accident, sickness or disability.
At outset you can choose to have the benefit paid to you after a period of time to coincide with any employers benefits ceasing. Typically the periods available are 4, 13, 26 and 52 weeks, known as the deferred period, the longer the period the cheaper the policy will be. The policy can be arranged to expire at a specific time, for example to provide protection for loan or mortgage repayments, or to a selected retirement age providing that extra peace of mind throughout a career.
How much cover is available?
Benefit is typically limited to 50-70% of gross salary and is paid tax free. The reason for a limit on the amount of benefit is to encourage people back to work rather than relying on the policy. There is no limit to the number of claims that can be made throughout the duration of the policy and there are no penalties for making claims.
When considering how much cover an individual will need, it is very much dependent on individual circumstances, which will depend on things such as:
- Household expenditure
- How much a family relies on a certain level of income
- Savings that are available and attitudes towards spending those savings
- How much and how long benefit is received from employer
How much does IPP cost?
The monthly premium cost will depend on a number of factors:
- Amount of benefit required
- Gender
- Occupation
- Age
- Medical History
- Smoker status
- Leisure pursuits
There are other options which can be added to the policy which will have an effect on the cost, for example, hospitalisation benefit, which will cover medical treatment if a policy holder is confined to hospital during the deferred period.
It is also possible to arrange for benefits to increase annually so that the benefit can keep in line with inflation and/or a cost of living pay rise. Along with increased benefits it is important to bear in mind that the premium will also increase but an increase can be declined by the policyholder.
It is very important to review IPPs on a regular basis to ensure that benefits meet individual needs, especially after a career change or a significant change in salary.
Weighing it up!
Advantages and disadvantages of IPPs for consideration:
Advantages
- Can pay an income to retirement if required
- Designed to pay monthly expenditure
- Benefit can increase in line with inflation
- No limits to the number of claims
- Benefit pain tax free
Disadvantages
- Benefit may not be paid if false information is provided at application
- Benefit covers less than 100% of salary
- No benefit paid for a period of time
- Redundancy cover not included
- Monthly premium must be paid
Critical Illness Cover (CIC)
If someone suffers a serious illness, for example cancer or heart attack, there may be a need for a lump sum to cover immediate expenses, such as travelling to and from hospital, adaptions to the home or car, or to pay off a mortgage.
Modern medical science means that more and more people are surviving after suffering from a critical illness. CIC is similar to Life Assurance but pays benefit whilst policyholders are still alive and recovering.
Imagine, during a very upsetting time after being diagnosed with a critical illness, being able to clear the mortgage, possibly the biggest expense out of the family’s budget. Or, being in a position where a period of recuperation can be taken rather than rushing back to work to earn money to pay the bills.
How does CIC work?
CIC is designed to pay out a tax free lump sum on diagnosis of a specified critical illness. The number of critical illnesses, as many as 30, that are covered vary between different providers so it is important to read any Key Features Documents or policy documents provided to see exactly which are covered under each policy.
The common illnesses covered are:
- Cancer
- Heart attack
- Stroke
The policy will run for a set term, decided at outset, usually to coincide with a term of a mortgage or with retirement age for example. Benefit will be paid if a successful claim is made during the lifetime of the policy. It is possible to have the policy in a single or joint names, the policy will end once a benefit payment has been made.
Life cover is available to run alongside CIC, in most cases at no extra or minimal cost, providing extra peace of mind. CIC policies can be level i.e. the amount of cover stays the same throughout the term, or decreasing, for example, to allow the amount of cover to decrease in line with a mortgage debt reducing.
How much does CIC cost?
The monthly premium cost will depend on a number of factors:
- Amount of benefit required
- Gender
- Occupation
- Age
- Medical History
- Smoker status
- Leisure pursuits
At outset, the applicant can choose to have the premiums guaranteed or reviewable. Guaranteed means that the premiums are guaranteed to remain the same throughout the term of the policy. Reviewable as the title suggests are where premiums are reviewed every five years and an adjustment to the premium cost may be made at that stage based on claims history experienced by the company, not the individual’s claim history. Reviewable premiums are likely to be cheaper than guaranteed at outset.
There are other options which can be added to the policy which will have an effect on the cost, for example waiver of premium, where the insurance company would meet the cost of the monthly repayments if the policyholder is unable to work due to sickness, accident or incapacity.
This is just a few examples of options that are available which vary from provider to provider. It is important to review any information provided by insurance companies to see the options available and assess whether they are suitable for an individual’s circumstances. Beware, the cheapest policy is not always the best, the number of illnesses covered and options vary between providers.
Weighing it up!
Advantages and disadvantages of CIC to consider:
Advantages
- Pays benefit on diagnosis of a specified critical illness
- Benefit is paid tax free
- Provides financial peace of mind
- Wide range of conditions and illnesses are covered
Disadvantages
- Benefit may not be paid if false information is provided at application
- Premium may be increased at outset due to applicant or family member medical history
- Will not pay out if self-inflicted
- Policy will be cancelled if premiums not paid
Until we catch up again with part 3 Paul Hoskin IFA.