A wise person once said “To expect the unexpected shows a thoroughly modern intellect”. And there lies the value of insurance. Insurance (also referred to as protection or cover) allows us to take some control and prepare for events in life that are unprecedented.
Financial security in the face of events such as illness and loss of income (whether it be via redundancy, change of job or other matters) provides reassurance. Likewise, so does a plan to ensure loved ones and dependents are taken care of in the event of your passing. Talking about unemployment, illness, or death is never pleasant, but necessary if you want to create a plan should any of those events occur.
Insurance can feel like a minefield. What types of insurance are there? Which ones do I need? How much should I cover myself for? Just some of the questions commonly asked.
It’s also vital to ensure you are properly protected. It can be easy to source insurance online, but how can you be sure that it meets your needs and, if you did need to claim, would it be successful? The small print and T&Cs aren't the easiest to get your head around.
There is also the matter of factoring it into your financial plan. Insurance works well when it supports your financial goals. There is no point in having insurance for less than you’d need to cover your lifestyle. On the other hand, your investments may be enough to fund you, so you might need less insurance than you think. That is where your financial planner can help.
We suggest seeking advice from a planner who can look at the whole of the market and provide a guide as to which insurance policies are best for you. At Stephen Eve, this is free of charge for you, the client, even if we don’t currently manage your money. If you are interested, we’d be happy to have a chat over a complimentary call. Our contact details are here, but, in the meantime, we thought it would be useful to summarise the different kinds of insurance available to you.
Life insurance pays out either a lump sum or regular payments on your death, to a beneficiary you name within the policy. People often take out this kind of insurance to ensure loved ones and dependants have financial support after they have passed. Some mortgage providers also ask for this to ensure your mortgage could still be paid in the event of your death. Another reason to take it out is to cover funeral costs so those organising do not need to fund it.
The amount of money paid out depends on the level of cover you buy.
There are two main types of life insurance – term life insurance policies and whole of life insurance policies.
Term life runs for a set period of time, for example 10 or 25 years, and only pays out if you pass away during this time.
There are three kinds of term life policies.
Whole of life policies pay out no matter when you die (provided you have paid your premiums up until death). These plans are, however, often very expensive.
For both kinds of life insurance, you can choose a joint policy with a partner or a single one for yourself only. If you take out joint life insurance, you can choose for it to pay out on first death to the spouse, or on second death to your estate. This is unless you made alternative arrangements.
If you take out single life insurance, the money goes into your estate. So you need to decide who it goes to when you die.
Family income benefit is a type of life insurance designed to pay a regular income to your loved ones if you die. But rather than paying out a single tax-free lump sum as a standard life insurance policy would, family income benefit pays a series of smaller monthly amounts (also tax-free).
There are various types of critical illness policies out there, but generally they pay out when you are diagnosed with or undergo specific treatment for a specific condition.
If you claim, you receive a tax-free lump sum to cover medical costs, loss of income from being unable to work, and potentially alterations that may need to be made to your home during or following an illness.
Policies that cover more illnesses tend to have higher premiums (cost per month), since there is a higher likelihood of claiming. Similarly, your current state of health (i.e. level of activity, if you are a smoker etc.) will impact the probability of you becoming ill and therefore affect costs.
Income protection insurance pays you a regular income if you can't work because of sickness or disability, and continues until you return to paid work or you retire (as long as you are still within the policy term).
There’s often a pre-agreed waiting (‘deferred’) period before the payments start. The most common waiting periods are 4, 13, 26 weeks and a year. You choose the length of time you're willing to wait before the first payment is received.
All providers offer slightly different policies and pay out varying amounts of money. However, typically, pay outs can be from 50 - 70% of your usual gross earnings.
The main difference between critical illness (explained above) and income protection is that critical illness pays out a one-off lump sum if you have a specific serious illness, whereas income protection provides regular payments which help to cover your monthly earnings when you can't work.
For life insurance, critical illness, and income protection, the bigger the size of your potential compensation pot, the more likely it is to cost a higher amount each month.
Private health insurance (sometimes referred to as private medical insurance) pays some or all of your medical bills if you're treated privately i.e. not by the NHS.
The treatments covered range from day-care such as physiotherapy, counselling, osteopathy, to in-patient treatments such as tests and some surgeries.
As with other types of insurance, the cover changes depending on the details of the policy you take out and the premiums you pay. The cover will include the kind of care you wish to receive, which conditions and illnesses are included and the treatments available. Usually, the more you are willing to pay, the broader the range of cover you will receive, but this isn’t always the case.
Your level of health (i.e. the amount you exercise, smoke, drink, and the kind of diet you eat for instance) will also affect the type of cover available to you and how much this may cost. Equally, if you have pre-existing conditions or your biological family have any genetic conditions you could inherit, this can heighten cost.
MoneyHelper (a free service provided by the Money and Pensions Service) has some useful content on why you may want to take out private health cover.
There are also several other insurances that people commonly take out. These include but are not limited to home cover, travel insurance, car/vehicle insurance, and business insurances such as public liability and professional indemnity.
At Stephen Eve, since these are not directly linked to your personal financial plan, we do not advise on them. However, Citizens Advice and HSBC have useful guides on insurance that you may find useful.
A good financial planner will have a solid understanding of your financial situation, lifestyle, and the longer-term financial goals of you and, if applicable, your family. They’ll also get to know what your health looks like because, whilst this may seem very personal, it is intrinsically linked to how much money you may earn, receive and need.
If they are holistically planning for you, they will be responsible for your cash flow, retirement, estate, and tax planning.
It’s also likely that your planner can access a much bigger range of products than is available to you online.
All this to say, they can tell you which insurance is actually worth buying for you.
You may not be able to see what is around the corner, and in that case, why worry about something that might not happen? Very true, but equally, many people find comfort in having a ‘plan b’ and knowing they will feel financially secure should a ‘what if’ scenario occur.
