Protection in uncertain times
Fun is like life insurance – the older you get, the more it costs!
This is perhaps a flippant quote to use to start an article that explores the need to protect yourself and your family against unforeseen circumstances, especially in the current environment, but I assure you that it is indeed true.
For any financial plan to be fit for purpose, it must have strong foundations, and personal protection, whether that be life assurance, critical illness cover or income protection, is the bedrock on which our lives are built. Furthermore, as such protection is usually medically underwritten, typically the sooner such cover is enacted the cheaper the monthly cost will be.
It is evident that the incidence of COVID-19 and its impact on the nation’s psyche, our working patterns and economy has brought into sharp focus the need to ensure that we all have the necessary protection in place.
This article gives an overview of the types of protection that should be considered for personal and family protection, their uses and why they are so important.
Life assurance is the most commonly held form of personal protection, but even so a large proportion of the population is without cover. A recent industry study showed that 41 per cent of mortgage holders haven’t protected their debt*. In the event of premature death this could lead to severe financial hardship or even loss of the family home – a situation that could be simply and usually inexpensively avoided, if a little forward planning is done.
Term assurance, which offers a predetermined tax-free lump sum upon the death of the life assured within a specified timescale, is ideal for the protection of debt. Cover can be established on a single or joint life basis with a spouse or civil partner. The sum assured can increase to offer inflation protection, remain level or even decrease, perhaps to mirror a capital and interest mortgage.
When I say the lump sum paid is tax free, I mean that no tax is deducted. However, it is always best practice to place life cover in trust so that the policy proceeds are not only paid without the need for probate to be granted but, importantly, fall outside of the deceased’s estate for inheritance tax (IHT) purposes.
Family income benefit
Family income benefit (FIB) is an alternative form of term assurance. While the term and life assured are still fixed at outset, the way in which the sum assured is paid is different. Instead of paying a single lump sum upon death, an FIB provides a series of annual payments from the date of death until the end of the policy term. This regular ‘income’ can then be used to fund finite expenses such as private school fees or university costs. As the total sum that may be paid by the life assurer reduces over time under an FIB, when compared with an equivalent term assurance, the cost of such cover is substantially lower.
The third and final form of personal life insurance is whole-of-life cover and, as the name suggests, this differs from term assurance as it does not have a guaranteed end date. As long as the policy holder continues to pay the premiums, cover will continue to the date of death.
This certainty of a pay-out upon death makes this type of arrangement ideal for use in IHT planning. When established on a joint life second death basis with a spouse, again with the policy written in trust, upon second death the policy proceeds would be paid outside of the estate, allowing the beneficiaries to settle an IHT bill with HMRC within the prescribed time limit and subsequently gain access to the estate. Of course, this assumes that the sum assured is sufficient to pay the IHT bill. This perhaps highlights the need to review such cover regularly, as we all know our client’s wealth will change over time.
I think it is apparent that life cover is a simple proposition that can and should be used to lessen the financial impact of the death of a loved one. The cost of such cover and ease of access to advice should not be a barrier to most – the risk of inaction should not be ignored.
Advancements in medical science now routinely mean that those who become seriously ill no longer die as a direct result of their condition. So, their family cannot make a death claim on the life assurance, but the life assured isn’t well enough to continue their normal lives.
Enter critical illness cover, which provides a tax-free lump sum upon the diagnosis of one of a wide range of serious medical conditions that do not necessarily lead to death.
While such policies were originally limited in their remit covering such core conditions as cancer, stroke and heart attack, which still account for circa 80 per cent of all claims, now up to 40 individual conditions are covered, as defined by the Association of British Insurers (ABI) guidelines**.
Upon formal medical diagnosis of any one of these conditions, a claim can be submitted, and the proceeds should be paid. This will allow the life assured to perhaps repay debt or simply access a lump sum to help with their recovery and continued living expenses.
While critical illness cover comes at an additional cost, it can be packaged with life cover within each of the structures previously mentioned to provide comprehensive protection not just for those we leave behind but also ourselves.
Cutting-edge treatment, and indeed vaccines, can fight infection but do not necessarily lead to a cure; protection against serious illness and not death is therefore perhaps more relevant than ever before.
Income protection policies
The third and final element of any sound personal financial protection plan is income protection insurance. This is ideal for those who are self-employed or who have inadequate employer sick pay provision.
In return for a monthly premium, if due to illness or accident the life assured is unable to carry out the principal duties of typically their own occupation, they can claim a proportion of their pre-tax income. Subject to a deferment period, a tax-free benefit of usually up to 65% of their qualifying earnings should be available. In the event of a successful claim, this income should be paid until a return to work can be made, the policy end date, which is usually the intended date of retirement, or death occurs.
Life cover is the most commonly held form of protection and perhaps the type that is most familiar; however, critical illness and permanent health insurance should not be overlooked, after all Cancer Research UK states that someone in the UK is diagnosed with cancer every two minutes***.
I trust the above has been a helpful overview of the simple protection tools that should be used to protect all of our clients. The need to review our protection needs, not just against death but also serious illness, has never been greater.
**ABI.org.uk – Guide to minimum standards for CIC
Michael Fryer, Wealth Management Consultant at Mattioli Woods plc