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Family Protection

Could your family cope if you lost any of your income sources?

There are many different ways to protect your family and your standard of living when you need it most. However, as you can imagine, the number and types of products can be very confusing.

Therefore, in order to get the most suitable cover available you need advice from an experienced professional like Thorburn Wealth Management Limited.



Life Protection Options

Protect your family

There are several ways in which you can protect yourself and your family in the event of an untimely death.

Most people take out Assurances to provide for their families and alleviate any financial worries at this difficult time.

This can be done on a life only basis or can include critical illness cover for either the full or a lessor amount.

In many ways critical illness can be more financially ruinous than death as all of the existing expenses need to be met and depending on the nature of the critical illness, additional lump sum or regular expenses can accrue.

In order of priority classic financial planning says that the protection steps are as follows:

Protect any Debts including Mortgages - You would not want to leave your successors with any debts to be repaid

Protect the ability to continue enjoying their standard of living - Ensuring debts are repaid is one thing but this doesn't not put food on the table or facilitate payment of household and discretionary expenses.

Additional cover is required for this purpose




Different Types of Life Cover

Different Types of Life Cover

Level Term Assurance pays a lump sum in the event of death during the term of the policy. There is no investment element within a term assurance contract, so at the end of the term there is no maturity value and life cover ends. The benefit is paid tax-free. Premiums are usually monthly and fixed throughout the term. As the term and benefit are known from the outset, and there is no investment content. Term assurance therefore can be a cost-effective method of protection.

Decreasing Term Assurance works in a similar way to Level Term Assurance, but the benefit is set at the outset and gradually decreases over the term of the policy. These policies can be used as cover for a repayment mortgage, or other loans where the amount of capital outstanding also decreases over time. As the benefit reduces over time, the premiums are usually lower than for Level Term Assurance.

Endowment

Can work in the same way as either a Level Term Assurance or Decreasing Term Assurance but with an investment element which provides a return on maturity.

Less popular than in the past, and providing an investment return at maturity increases monthly costs substantially

Whole of Life

If the need for cover continues until the life assured(s) death then the solution may be a whole of life policy

Available in either pure protection or with an ancillary investment element

Family Income Benefit

If the idea of a lump sum does not appeal, Family Income Benefit is a great option which reduces the cost substantially and enables far greater levels of initial cover.

It works the same as decreasing term assurance but instead of paying a lump sum upon death, it will usually pay a regular monthly/annual tax-free income in the event of death to your dependants up until the end of the term of the policy.

Critical Illness Insurance

Critical Illness Insurance is usually available as an addition to all life term assurance plans but can be bought on a standalone basis. Critical illness provides a lump sum benefit / income in the event of diagnosis of certain critical illnesses, such as heart attack, stroke, transplant, blindness, total and permanent disability. The illnesses covered will be specified in the policy along with any exclusions and limitations – these differ between insurers.



Why Do You Need Income Protection Insurance?

Income protection

According to consumer group Which?, just about every adult should consider getting Income Protection.

The simple fact is that many people worry that they would not be able to pay all their bills and buy food for the family if they lost their ability to work for some reason.

One of the biggest reasons for this loss of income is becoming ill or getting injured. Income Protection insurance provides regular payments that allow you to keep paying your bills.

You cannot insure 100% of your normal monthly income, but you can get up to 70% of your pre-tax (gross) earnings.

But Just How High Is the Risk of Becoming Sick and Being Unable to Work for An Extended Period?

Data shows that around 15% of the over-55s had been out of work for at least 6 months at some point during their careers. Besides this over 2 million people are what statisticians call 'economically inactive' due to long-term sickness.

As you can see the risk of illness and injury is higher than many people think.

Income protection can provide an essential lifeline during such times.

Without Income Protection Insurance what are the Financial Consequences for You and Your Family?

Employment & Support Allowance or ESA (the main state incapacity benefit) averages out at less than £75 (as of 2020), which is nothing like enough when the average family spends £500 a week.

There are other government benefits, but they rarely provide the amount of income needed.

Does Everyone Need Income Protection?

Whilst just about everyone could benefit from having Income Protection Insurance if they became unable to work for an extended period, some groups of people are particularly vulnerable:

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  • Self-Employed / Contractors
  • This group rarely has any form of employer provided sick pay.

  • Company Directors
  • As with the above group, Company Directors don't typically get any sick pay from their limited company and thus could struggle without support.

  • Occupations with a High Risk or Low Sickness Tolerance

    There is no doubt that many jobs are particularly risky. Any job requiring manual labour, be it working at height, with heavy machinery, or simply on a building site is inherently riskier than doing a 'desk job'.

    Other areas of employment have a different problem, in that even a very minor injury or illness could stop them working.

    Who Doesn't Need Income Protection?

    Not all people need Income Protection Insurance. Those with extensive savings, non-earned income, or where they are not the main earner in a household (and where the other party could cover any lost income), probably don't need this cover.

    Do remember though, even if you do get sick pay, the majority of workers get less than 3 months of full employer sick pay. Whilst this might provide enough time to recover from any minor illness or injury, it is unlikely to be enough for a serious condition, such as cancer.

    Your Definition of Incapacity

    This will make a huge difference to the cost of the policy. Each provider lays out their definition of incapacity, this being the point at which you can claim benefits.

    Own Occupation Cover

    Under such a policy, you are able to claim as long as your injury or illness stops you from working in your own specific job.

    For example, if you are a Lathe operator and an injury prevents you from using your right or left hand, you would be covered by your policy as you cannot work in your selected occupation.

    Suited Occupation

    These policies are often cheaper, but that is because they will only pay out if you are unable to work in any job where you have the experience or education to perform. In such instances, the Lathe operator may be able to work in the factory in another position and would therefore not be able to claim.

    Any Occupation

    This definition of incapacity is even wider and means you can only claim if you're totally unfit to work or unable to perform a set number of the basic tasks needed for most jobs.

    As you can see, this is another area where careful consideration has to be applied, if the best policy is to be purchased.

    If I Need To, How Do I Make a Claim?

    As explained above, most policies will not pay out immediately, the deferred period having to be served first. So, you only have to notify the insurer if you think that your injury or illness will keep you out of work for longer than the deferred period you selected. However, if you are in any doubt, it is important to make the claim at the very start, as that allows the insurer to keep track of when you stopped being able to work.

    Making a claim entails the filling out of a form and submitting evidence of your health condition / injury which has stopped you from working. This normally requiring a note from your GP.

    In some instances, other evidence may be required, such as notes from specialists / consultants and diagnostic tests or scans.

    Once approved and you've been out of work for longer than your deferred period, your insurer will start paying out a tax-free monthly income until either:

    • You're well enough to be able to return to work
    • The end of your claims period (1 to 5 years for short-term policies) is reached
    • Or the policy ends (normally when you reach retirement age - for long-term cover).

    How to set the cover up

    How Fast Should the Policy Provide Support

    This is known as the 'deferred period' and defines the length of time you would need to be off work before the policy starts paying out. This ranges from 28 days up to 2 years, with shorter deferred periods costing a lot more than longer ones.

    Age Based premiums

    These age-based premiums are also cheaper at the start but as they rise each year (as you get older) they can work out more expensive over the life of the policy. The insurer will also, more than likely, increase the premiums at times (due to high rates of claims etc), but unlike reviewable premiums, these age-banded premiums can only rise by a pre-set amount, this being laid out in your policy documents.

    Guaranteed premiums

    These look more expensive initially, but as they cannot be adjusted over the life of the policy - unless you make any changes to the cover, they work out cheaper in the long run.

    Limited Term Cover

    The policy can be written to only pay out for a limited period, regardless of whether the disability or ill-health which forced the claim continues beyond this period.

    As liability for the insurer is limited, this can be a substantially cheaper option, but calls into question why the contract was put into place in the first place.

    Possibly applicable to the self-employed/ business owners as a bridge to enable them to sell their businesses in the event of long-term sickness.

    Indexed Cover and Premiums

    In order to offset the effects of inflation on the level of benefits, both the cover and consequently the premiums can be index linked to ensure benefits keep pace with inflation.

    Will A Claim Be Paid?

    This is a question that many ask, the level of trust being low in some instances. The good news is that the vast majority of Income Protection providers publish their claims statistics. This allows you to see which seem to be fairest and the best to use.

    Statistics show that nearly 90% of claims are paid, but in order to protect yourself, it is necessary to ensure that the application form is fully and honestly completed. You also should be fully aware of the exclusions in your policy so you know exactly what you will and won't be covered for from the start.

    Other Types of Personal Insurances

    Together, Life Cover, Critical Illness and Income Protection provides insurance against death and certain illnesses, commonly referred to as dread diseases, but they will not cover unemployment or short-term sickness. This leaves some very large holes in your umbrella of protection and is therefore not a complete solution.

    Financial products are sometimes at their most useful, when they are protecting our families, our incomes or our property.

    Whilst insuring ourselves against an undesirable event such as sickness, or even death, may not be a pleasant thing to think about, the benefit of being able to set financial issues aside at emotionally difficult times cannot be overlooked.

    There are many ways in which a family can protect itself, and because of the large range of products available, there is usually an appropriate policy for most circumstances and most budgets.

    Accident - Sickness, Accident & Unemployment Insurance

    Accident - Sickness, Accident & Unemployment Insurance

    How Does Accident & Sickness Insurance Work?

    Before you take out any policy, there are three major decisions to make:

    1. How Much of Your Income Do You Wish to Cover

    Insurers will cover anywhere from 50% to 70% of your gross (pre-tax) income, the more covered, the higher the premium.

    2. How Fast Should the Policy Provide Support

    This is known as the 'deferred period' and defines the length of time you would need to be off work before the policy starts paying out. This ranges from 1 day up to 2 years, with shorter deferred periods costing a lot more than longer ones.

    3. Pick the Amount of Time the Policy Will Pay Out For

    These are generally short-term plans as opposed to Income Protection Plans which are longer term in nature.

    How Much Does Sickness Insurance Cost?

    As you can imagine, the cost of Sickness Insurance varies quite a lot, the premiums depending on:

    • The level of cover selected.
    • The amount of money you are looking to receive.
    • Your age. This is based on your age at the start of the policy, so the later you leave it to start one, the higher the cost of Income Protection insurance.
    • The age at which the policy ceases.
    • The number and severity of any health conditions you may have (some insurers will increase the premium for some conditions, or simply exclude them from cover)
    • Whether you have ever smoked.
    • The length of the deferral period.

    Personal Accident & Personal Injury Insurance

    This type of policy is also known as Personal Injury Insurance and is the one type of insurance that we normally warn people to avoid.

    One reason is that the cover only kicks in should you suffer an accident or receive one of the specified serious injuries. Just one lump sum payment is made, whether you can work or not, is not taken into account.

    For most people this single payout will not be enough to help them make up any lost income for anything other than short periods.

    Another thing against these policies is the extensive fine print. This is very detailed and often includes the following standard exclusions:

    • If your injury is caused by sickness or disease
    • Or by Stress fractures, sprains and strains
    • Or if you are injured while you're under the influence of alcohol or some drugs

    But What About Unemployment Insurance?

    Being covered for sickness is one thing, but there is another situation that could really damage your income, and this is redundancy / unemployment.

    Some sickness insurance policies include, or give you the option to include unemployment cover. But whichever way you gain cover, it is something that you need to consider.

    Private Medical Insurance

    Having seen the pressures under which the NHS operates, and delays experienced before treatment can commence, increasing numbers of people are looking to remove that uncertainty and arrange Private Medical Insurance.

    With a myriad of options and at far lesser cost than many imagine, this is increasingly becoming an option for families and their children

    Picking the Most Suitable Solution

    This is just what Thorburn Wealth Management Limited is here to help with. We have extensive knowledge of the marketplace, and as we are independent financial advisers, are not tied to any group of products.

    We pick the most suitable policy, the one that fits your own unique personal requirements.

    A Foot Note - The Conditions You Must Be Aware Of

    It is vital when buying any form of Insurance, that you fully understand and comply with the processes involved. This ensures that there are no nasty surprises when you come to claim.

    All insurance contracts are based upon the principle of utmost good faith, if you deliberately withhold information or knowingly respond untruthfully the cover will be invalidated.

    One particular issue is that of pre-existing health conditions. Under certain types of covers, these are not covered, although some may provide cover once you have not received any advice, medication or treatment for that condition for a set time period.

    In common with all the underlying medical and lifestyle information provided, these can impact the premiums quoted. Unemployment Insurances also have some restrictions, and will not usually pay out if you are made redundant / leave work for any of the following:

    • You have become voluntarily unemployed
    • You have chosen to take a career break (unless it is to become a carer)
    • You were made unemployed due to your own misconduct, fraud or dishonesty
    • Your unemployment was caused by industrial action.

    Many insurers will also decline cover if you had prior knowledge of your redundancy before setting up the policy. This varies depending on the insurer, again making the choice important in some instances.

    There are many different considerations involved. However, as you can imagine, determining your requirements requires specialist knowledge.

    Therefore, in order to get the most suitable cover available you need advice from an experienced professional like Thorburn Wealth Management Limited.



    Contact us today

    Contact us today to arrange your free initial consultation.

    Please also see our Frequently Asked Questions on General Investment Advice, Pensions and Family Protection.