Protecting your future
Is it time to give your protection portfolio an overhaul?

The start of a New Year is the perfect time to give your finances an overhaul and in particular to review the protection element of your financial planning strategy. When was the last time you considered and reviewed your critical illness cover, income protection and life insurance requirements?

Critical illness insurance
Critical illness insurance pays out a tax-free lump sum if you are diagnosed as having one of the specific life-threatening conditions defined in the policy. Some policies will also combine life and critical illness cover together. These pay out if you are diagnosed with a critical illness, or you die, whichever happens first.

The Association of British Insurers (ABI) launched the ‘Statement of Best Practice for Critical Illness Cover’ to enable people to understand exactly what critical illness cover provides and what they can claim for. The ABI specify a number of illnesses and definitions that must be covered for a policy to be classed as a critical illness policy, however some companies offer additional definitions and illnesses on top of these.

Income protection insurance
Income protection insurance is also known as permanent health insurance. It is designed to replace part of your lost earnings if you are unable to work because of illness or disability.

Depending on how much cover you chose to buy, income protection insurance provides a tax-free monthly payment of between 50 and 60 per cent of your usual earnings. The monthly payment typically continues until you go back to work or you reach retirement age.

What is covered
Income protection insurance pays out when you become ill or suffer an accident and, as a result, are left unable to work. For a limited period, some policies also make a ‘partial’ or ‘rehabilitation’ payment if you are able to return to your old job but in a reduced capacity, for example, part-time. Some policies also make a 'proportionate' payment which tops up earnings if you go back to work full-time but take a lower-paid job.

Life insurance
Life insurance assists your dependants to cope financially in the event of your premature death. When you take out life insurance, you set the amount you want the policy to pay out in the event of your death – this is called the sum assured. There are two basic types of life insurance: term assurance and whole-of-life cover.

Term assurance
This is the most straightforward type of cover with no investment element, paying out a lump sum if you die within a specified period. Often term assurance is bought at the same time as a mortgage, and taken out for the same period.

There are several types of term assurance:

Level term assurance – this offers the same payout throughout the life of the policy, so your dependents would get the same amount whether you died on the first day after taking the policy out or the day before it expired. This tends to be bought with an interest-only mortgage, where the debt has to be paid off only on the last day of the mortgage term

Decreasing term assurance – the payout reduces by a fixed amount each year, ending up at zero at the end of the term. Because the level of cover falls during the term, premiums on this type of insurance are lower than on level policies. This cover is often bought with repayment mortgages, where the debt falls during the mortgage term
Increasing term assurance – the potential payout increases by a small amount each year.

This can be a useful way of protecting the initial amount against inflation.

Convertible term assurance – the policyholder has the option of switching in the future to another type of life insurance such as a ‘whole of life’ or endowment policy without having to submit any further medical evidence
Family income benefit – instead of paying a lump sum, this offers the policyholder's dependents a regular income from the date of death until the end of the policy term

Whole-of-life insurance
This is a policy that lasts throughout your life, so your dependants are guaranteed a payout whenever you die. There are different types of whole of life policy. Some offer a set payout from the outset, others are linked to investments and the payout will depend on performance. Investment-linked policies are unit-linked policies, linked to funds, and with-profits policies offer bonuses.

Need more information? Please email or contact us with your enquiry.

Levels and bases of, and reliefs from, taxation are subject to change.