Can you risk not being protected if you are unable to work. Here we explain how Income Protection Insurance works and what to look out for.
How would you meet your financial debts if the worse happens?
What if an illness or injury prevented you from working? The impact of you being too ill to work could have devastating consequences for your family.
Protecting your loved ones by taking out income protection insurance, which pays out if you become unable to work, could prove to be a very wise move.
What help is available?
Many of us believe the Government or our employers will help us when we are unable to work. We know the state benefits we qualify for can offer some limited help, particularly if you have a mortgage. You may even qualify for benefits like housing or carer’s allowance, but it can be a while before it is available and normally will only cover the interest on your loan.
Even if you are employed full-time, your employer will, after a period, cease paying your full salary, leaving you and your family to survive on benefits. This can be from as little as £85 per week.
How can income protection insurance help?
Income Protection is an insurance which is there as a safety net to help cover your outgoings while you are unable to work, income protection starts if you have an accident or fall ill. Payments normally begin as soon as you suffer a loss of income, through illness or an accident.
If claimed in accordance with your policy’s terms and conditions this could be within a few weeks of your accident or, if your contract states that your employer will continue paying your full salary for a set time - the payments could start when your salary payment stops. Which means you can defer payment of benefits to suit your circumstances and reduce the cost of the insurance premiums.
These premiums are also variable depending on how much income you want to receive while you are not working. You can generally choose to receive up to 75% of your salary but you will pay less if you think you can survive on 50% of your salary.
Is critical illness insurance the same?
No, Income Protection is not the same as Critical Illness Insurance. It is important to realise that Critical Illness Insurance does not replace the need for income protection cover because the benefits offered are different.
Critical illness insurance pays out a lump sum if you are diagnosed with an illness that is included on a pre-determined list. Income protection insurance, on the other hand, pays you a regular income if you are unable to work due to an illness or an injury
What is not covered?
Income Protection Insurance will not cover loss of income due to redundancy or being sacked by your employer. Illnesses that you have had in the past are also likely to be excluded, as are certain riskier professions.
You should always read the exemptions on the policy carefully. Also ensure you read the terms and conditions of the policy carefully, and make sure you understand all the definitions.
When it comes to the financial security of your family, it is a must to consider their future and this means facing up to the darkest of subjects. What would happen to your family if you were no longer there to provide for them? Would your loved ones be able to pay the bills? Would they be able to stay in the family house? These are some of the questions that need to be addressed and the solution could be an easy one… life insurance.
According to recent research it seems that many people are not prepared and only a few have life insurance in place, with some admitting they don’t know how much they are covered for. Have they enough to meet the needs of their family? This needs to be carefully considered when taking out insurance.
We insure our vehicles, our property and even our mobile phone, so why are so many people overlooking the most important asset, their life?
Life insurance is generally taken out to cover an outstanding mortgage to allow your family to remain in their home. There could be nothing worse than losing a loved one, but to see them face financial difficulties and potentially lose their home at such a vulnerable time is unthinkable.
Life insurance cover can also be used to help the family pay future bills or paying an inheritance tax bill (40 per cent on anything in excess of £325,000) are further uses for the payout.
Whatever your age, life insurance can be a vital lifeline to your family if you’re no longer around. Equally important is making sure your life insurance plan is reviewed regularly and the type of cover to ensure it reflects your needs and the requirements of your family. Your situation changes during your life, you may have more children and your income and outgoings could alter over time. It is these life advancements that make it all the more imperative to review the cover you have. It’s easy to top up or take out an additional policy to keep up with your family’s requirements.
When taking out life insurance, be sure to compare the premiums and policies on offer. It generally costs more the older you get, but as life insurers compete for business and reduce rates, there are good deals out there. Don’t settle for the cheapest deal either as this may not offer the type of cover you need. Take time to research what is on offer, speak to your professional financial adviser and above all make sure your family are secure should the very worst happen.
Death is never a good subject to discuss, but there are times when we need to bring the inevitable to the forefront and discuss such difficult issues
Life insurance might be something you have never really thought about, but if you are over 55 and concerned about how your family would manage if you passed on, it could provide the peace of mind you need.
If you want to be sure your family can be financially secure, it’s worth checking what kind of over 55 life cover is available.
Even if you’re not the main earner this may be something you want to look into regardless of your financial situation, just to be on the safe side.
Why think about over 55 life cover?
Security is key and that may be to protect your mortgage or any large loan, or a partner who perhaps can’t work because of disability, or you have children and would like to leave something behind to support them.
How would your partner manage?
Would they need to pay for outside help and support?
Whatever the reason, you need to be aware that because of the greater risk involved with such policies, getting life insurance for people over 55 is dependent on certain factors.
Finding life insurance when over 55 isn’t easy
Many insurers still provide life assurance policies to older people, but when making an over 55 insurance comparison you may find you have to pay a good deal more.
When working through the life insurance quotes over 55’s should be prepared to submit more information about their health and lifestyle.
Even if you are in peak physical condition the chances are that over 55 life assurance premiums will be more expensive, this is because the insurance company is covering greater risk.
You need to check the Terms & Conditions carefully as some insurers won’t pay out early if you become terminally ill.
Cover offered by certain providers will include specific critical illness cover, so it’s also worth comparing a number of different deals.
What type of insurance policy is best for you?
There are different types of life insurance, decreasing term, level term and whole life.
While decreasing and level term policies last for a set period of time, whole of life assurance can cover you for as long as you require.
If you are considering life assurance to cover a mortgage or large debt you can look for a term life insurance policy to run alongside it.
Decreasing term insurance is often linked with financial products, such as mortgages, and ensures your partner or loved ones would be able to pay off the outstanding borrowing amount. Because they are often linked to mortgages they last for a set period and the benefit amount decreases steadily. If your loan/mortgage is set up on an interest only basis, then level term assurance might be more suitable as the debt does not decrease over time.
Decreasing term policies are generally cheaper than whole life policies, because there’s less risk that insurance providers will have to pay out.
However, if you are looking for something which will maintain a fixed benefit rate to provide more general support should you die, then whole life assurance might be the better option. These policies are more likely to last longer and could pay out a large sum, but the premiums will be greater.
As with all types of insurance, remember to compare what’s on offer, and check thoroughly what’s included in the plan.
Fraser Brydon - Money Matters
Protecting against the loss of critical personnel
Key employees, like directors or critical persons could affect the business should they not be available to work for whatever reason.
You may need to protect your business against unforeseen circumstances such as long term sickness or premature death. If this is a worrying factor, then you may need cover to give you peace of mind.
What protection does the policy provide?
Different providers will offer different forms of cover and it is important to scrutinise the policy carefully to be sure just what is on offer in all individual cases.
• Generally they provide cover in areas such as: A death in service of an employee or director who is critical to your business operations.
• A critical illness to a very important employee or director, which may result in them being unable to return or continue with their normal activities.
• The insured benefits to the company would typically include a cash lump-sum payment to the policy holding company.
How would a lump sum payment help?
It could help by:
• Covering a loss of initial business and/or capital start-up investment.
• The costs of replacing the individual concerned, perhaps on a temporary basis.
• Business loan repayments that could be at risk as a result of the impact of the circumstances involved.
Are there any exclusions or conditions attached to the cover?
Any insurance policy of any type will bring with it conditions that may or may not include certain things that are not covered.
Once again, it is imperative that you read the policy carefully before deciding to purchase it.
Should I proceed?
Only you can answer this question, but remember people are your greatest resource, they are also potentially one of your greatest liabilities.
Many business owners recognise just how much their operation relies and depends upon a given individual, whether that person is an IT technician, managerial or executive level. You should assess your need for Keyman Insurance by performing an exposure analysis, relating to the people that work for your business, including executive employees.
It is never good to discover your exposures, unavailability which brings your operation to a grinding halt.
If you fail to plan, then you plan to fail!
Fraser Brydon - Money Matters
Income protection insurance can help ease the difficult situation of suddenly no longer being employed.
Whether you lose your job for circumstances that are beyond your control or you become sick with an illness that prevents you from working for a specific period of time, there is much relief that can come from having insurance at a difficult time to replace the income that you were previously earning and to provide the protection that you need. Many different types of individuals compare income protection cover and purchase this insurance for the protection of income and the needs of those individuals vary from one situation to another.
Whether you have a fear of losing your job and being unemployed or you fear that you will develop an illness in the future, there can be many reasons to purchase income protection insurance now to provide protection against what may go wrong in the future. Before purchasing this form of cover however, it is essential to understand the benefits as well as the options that are available to you.
This is important because these details can help you find a great premium for the cover you need and will help you to make the best policy purchase.Remember to keep in mind that, regardless of your current situation, your circumstances can change at any time. While you may be healthy now, this can change very quickly. As such, income protection insurance can be purchased to protect against the things that can go wrong in the future.
Fraser Brydon - Money Matters
Mortgage approvals across the country have increased since April, with the largest increase in lending agreements since the pre-crisis days of 2008. This is possibly due to the Funding for Lending scheme.
With an increase in mortgage activity comes a rise in the number of products and services sold alongside these new home loans. New first time buyers trying to pick their way through the paperwork and legal promises, may take the first product on offer which could end up costing them a fortune, especially when that product is life insurance.
Nobody wants to pay for something they hope they will never need, let alone think about what would happen to their families if they died suddenly. These are the main reasons why there is a vast protection gap in the UK with many households exposed to financial catastrophe in the event of unemployment, illness or death. However, while life insurance should be the bedrock of family finances, it needs to be purchased with care. A recent YouGov survey found that more than half of those who have bought life insurance did so to secure their mortgage repayments, in order to protect their family from losing their home if they died suddenly.
But simply accepting the first policy on offer could cost you thousands of pounds in the long run as the difference between the cheapest and most expensive life insurance premiums can be hundreds of pounds a month. There is absolutely no obligation to purchase the policy offered alongside your mortgage agreement, nor do you have to stick with it if you did. For the easy life, people tend to take out new policies alongside a new mortgage, which often means that they accept the first quote provided. But it’s not too late; you can exit your life policy at any time if you find a better deal, however, you should not cancel your existing life cover until the new policy has been underwritten and accepted.
Professionals in the business state that Life cover is the most commonly bought product because it’s the cheapest, but it’s the cheapest for a reason. We are more likely to live a full life than have a serious illness, which means that products such as critical illness and income protection are very important.
Those looking for insurance cover must understand exactly what they’ll be covered for and under what circumstances. Life insurance is the most straightforward type of personal protection, paying out a lump sum to your family if you die during the term of the policy.
Premiums are calculated according to the amount of time for which you want to be insured and how big the lump sum pay out would be, as well as your age, lifestyle and health.
Critical illness cover is designed to ease financial pressure if you become ill or severely disabled, or even if your children do. This cover pays out benefits upon diagnosis of one of a range of different serious illnesses. These can vary between policy providers but all should include the major conditions like cancer, heart attack, a stroke, kidney failure, major organ transplant, and multiple sclerosis. The cost of the premiums will also depend on your state of health, lifestyle and family history. Read the small print to ensure you are clear on what is and isn’t covered.
Income protection covers you in the event of an accident, unemployment or illness. After an agreed period, usually between one and 12 months, it pays out a proportion of your monthly income, every month if necessary until you retire.
Bad news can hit at any time, in the form of an illness, injury or sudden death. We don’t like to think about it, but we do have to plan for it. So having the correct protection strategy in place will enable us to protect our family’s lifestyle if our income suddenly changes. Making the right choices can be difficult especially if we don’t seek professional advice.
Professional advice Obtaining professional advice is essential when making informed decisions about the most suitable sum assured, premium, terms and payment provisions. Professionals can ensure protection strategies that meet financial goals and needs. Whether you’re looking to provide a financial safety net for your loved ones, moving house or a first time buyer looking to arrange your mortgage life insurance - or just want to add some cover to what you currently have, you will need to make sure you choose the right type of cover and receiving the right advice and knowing which products to choose is essential.
Don’t be under-insured Life assurance helps your dependants financially in the event of your premature death. The “sum assured’ is the set amount paid out should you die. Even if you consider that currently you have sufficient life assurance, you’ll probably need more later on should your circumstances change. If you don’t update your policy as key events happen throughout your life, you may risk being seriously under-insured.
Times to insure There are typical events when you should review your life assurance requirements: Buying your first home with a partner Getting married or entering into a civil partnership, Moving house, Starting a family, Reaching retirement, Having debts and dependants
Lifestyle factors Life assurance premiums can vary according to a number of factors, including the sum assured and the length of your policy, plus individual lifestyle factors such as age, occupation, health and whether or not you smoke. If you have a spouse, partner or children, you should have sufficient protection to pay off your mortgage and any other liabilities. After that, you may need life assurance to replace at least some of your income.
Types of life assurance There are two basic types of life assurance, ‘term’ and ‘whole-of-life’, but within those categories there are different variations. The cheapest and simplest form of life assurance is term assurance. It is straightforward protection, there is no investment element and it pays out a lump sum if you die within a specified period. Whole-of-life assurance policies are designed to provide you with cover throughout your entire lifetime. The policy only pays out once the policyholder dies, providing the policyholder’s dependants with a lump sum, usually tax-free. Depending on the individual policy, policyholders may have to continue contributing right up until they die, or they may be able to stop paying in once they reach a stated age, even though the cover continues until they die.
Tax Issues The proceeds from a life assurance policy are tax-free, but they could form part of your estate and become liable to IHT (Inheritance Tax). The best way to avoid IHT on the proceeds is to place your policy into an appropriate trust, which enables any payout to be made directly to your dependants. Your first consideration is to clarify what you want the life assurance to protect. If you simply want to cover your mortgage, then an amount equal to the outstanding mortgage debt should be the assured sum.
At present Inheritance Tax (IHT) is payable at 40 per cent on any monies over £325,000. The nil rate band is the term used to describe the value an estate can have before it is taxed which is £325,000 for single persons (tax year 2012/13) or up to £650,000 for married couples (where the unused portion of someone’s allowance transfers to their spouse or civil partner on death). If you have an estate worth £500,000, £175,000 is taxed at 40 per cent, meaning your IHT tax liability would be £70,000.
Make a Will Making a Will helps you understand just what your estate is really worth at today’s prices. It also provides a good basis to understand how much IHT planning is required.
Gift Away Under present rules you can gift up to the value of £3,000 a year without it incurring any taxes. This can also be backdated if you have not used the previous year’s entitlement, for example, a couple could in effect gift £12,000 in the first year if they have not used a previous year’s entitlement and then £6,000 (£3,000 each) thereafter. Parents can also give up to £5,000 to each of their children as a wedding/civil partnership gift while grandparents can give up to £2,500. Others can also contribute to loved ones’ weddings/civil partnerships but are only allowed to give up to £1,000. You can make small gifts up to £250 to as many people as you like, as long as you have not already gifted that person in the same tax year. If you are still working and earning an income, you are also permitted to give away any surplus amounts of your income provided that, in making these gifts, your own standard of living is not affected. You must not then access your capital (savings and investments) to live off.
Seven-year PET Potentially Exempt Transfers (PETs) are a sevenyear rule which allows you to make additional tax-free gifts providing you do not pass away within the next seven years and can be anything from cash to property. Be aware that once a gift has been given you cannot still benefit from it, for example, you cannot give away the family home and then continue to live in it unless you pay the market rent. If you were to pass away before the seven years were up, the assets would be taxable, but there is tapering relief of the amount of tax payable which reduces the nearer you die to the 7 year period, this is known as ‘taper relief’.
Using a trust Putting your assets into a trust in your lifetime could be a good way of decreasing your IHT bill. Limited to the nil rate band, these gifts count as potentially exempt transfers, which means the same rules apply, therefore if you pass away before the seven years are up, IHT will be due. It is possible for a Settlor to place assets in excess of the nil rate band in a trust. These gifts are called ‘chargeable transfers’ with tax being payable immediately the asset goes into the trust. However, if the Settlor dies within seven years then there could be an IHT liability to pay too, but if the Settlor dies after the 7 year period the tax, above the nil rate band, has already been paid as a chargeable transfer.
Rebate Many people do not realise that they can claim back inheritance tax if the property they inherit sells for less than it was valued at during probate. Those who inherited between June 2008 to February 2009 and June 2010 to August 2011 are the most likely to be eligible for money back. With house prices generally falling across over the last four years, thousands of people could still be able to claim back any such overpayment.
Trust advice and Will writing are not regulated by the Financial Services Authority
Fraser Brydon - Money Matters
The savings protection limit Thanks to the EU directive as set on January 2011, all UK savers have the first £85,000 of cash protected in the event of their authorised bank or building society going bust.
The limit is applied ‘per individual, per authorised bank’. Meaning joint account holders can get up to £170,000 refunded if their bank fails. This is based on single authorisation, however, if the business is covered by a single authorisation the limit would be for their total of all the accounts you have with the different bank brands under the authorisation.
Why worry? The Euro zone crisis since May 2012 has also escalated in the last few months. Talks of Greece exiting the Euro and Spain receiving a bailout have left the future of the single currency in turmoil.
And the signs for the rest of Europe are worrying with other European economies struggling with debts. Euro zone problems have a direct impact on Britain’s banks, Lloyds Barclays and RBS are all likely to feel the full impact of European meltdown, should just one large country default; it could cause them catastrophic losses.
How does savings compensation works If your authorised bank or building society fails you are now protected, up to £85,000 back from the Financial Services Compensation Scheme (FSCS) or £170,000 for a joint account.
All UK-registered savings institutions have to sign up to the FSCS, agreeing that if one of them fails, the others step in and jointly repay depositors through the scheme.
New Europe-wide limits The new EU laws enforced a standard compensation limit across Europe at €100,000. The exchange rate into pounds sterling is set and reviewed every five years. The limit from 2011-2016 has been set at £85,000. The FSCS estimates that 95 per cent of UK savers will get back every penny in the event of a bank failure, thanks to the new rules.
Full protection? Savers should note the ‘per bank’ limit of £85k. This means that your savings are covered by the FSCS as long as they are not all held with the same savings compensation licence. Therefore savers should not hold more than £85,000 at the same bank, building society or credit union.
With the many takeovers, acquisitions and mergers of recent years, there are many inter-linked banks and building societies. Which means for example if you had three accounts with the same banking group, which does not have separate compensation licences for each of its brands, instead of getting three compensation claims of £85,000, totalling £255,000, you would only get back £85,000. However, if the bank is separately authorised by the Financial Services Authority, then you would get a separate compensation limit for each.
Foreign banks’ compensation limits UK limits do not apply at some foreign banks which operate in the UK who are signed up to their own country schemes, rather than the FSCS.
A popular bank with a foreign licence is ING Direct. The Dutch bank is covered from the Netherlands up to €100,000. That would be converted into pounds sterling at the daily exchange rate when claiming.
Banking confusion On savings, bank ownership is worth understanding, for instance Sainsbury’s Bank, which is 50 per cent owned by HBOS and 50 per cent by J Sainsbury is still separately authorised to all of the banks in the merged Lloyds Banking Group, which merged with HBOS and all of its savings brands, including Bank of Scotland and Birmingham Midshires, on 19 January 2009, with Sainsbury’s Bank plc the sole licence-holder.
Another example is Lloyds Banking Group, customers should note that there are still two clearly separate licences for the purposes of the Financial Services Compensation Scheme - Bank of Scotland, which covers Halifax, Bank of Scotland, BM Savings, Intelligent Finance, AA and Saga; and Lloyds TSB, which covers Lloyds TSB and Cheltenham & Gloucester.
Compensation from building societies As mutuals, all building societies are independently governed by their own board of directors and cannot be owned by another institution. So each of the nation’s building societies will be separately covered by the FSCS up to £85,000 for each member.
Offset mortgages Prior to 1 January 2011, someone with savings and a mortgage at the same bank saw their savings confiscated to pay down any outstanding debt. Since January 2011, offset mortgage receive up to £85,000 in cash before anything else happens. Under insolvency law, savers with deposit cash remaining after the £85k has been repaid will now see the surplus used to reduce their mortgage debt and therefore not totally lost before any takeover by another lender.
Fraser Brydon - Money Matters
Can you manage if your circumstances were to change? What would you do if a close family member was to die? Would you cope financially? What if your income was to cease through illness or redundancy? Should you consider insurance or add some additional cover?
To understand and assess your ability to manage you need to calculate your everyday expenditure versus your income. This will help highlight how you would cope if your income was lost or indeed if you suffered an unexpected event such as a burglary.
There are many insurance products tailored to help in a number of different circumstances. For instance, a protection insurance policy that pays out if you or your partner becomes ill, such policies generally only pay out for a limited time, and do not cover all illnesses, so it is always advisable to check the exclusions before you take out a policy.
Life insurance plans, provide some financial security for those who depend on you should you die.
If you own your home are you adequately covered? What if your house/apartment was involved in an accident, flood or fire? You must ensure you have adequate buildings insurance to provide for the rebuilding of your house, mortgage providers insist on it!
Valuables and belongings require cover too. Contents insurance covers the loss of or damage to the contents of your home, such as, furniture, electrical goods such as TVs, computers, and smaller items like cameras, jewellery, briefcases and other items you carry outside of your home. Most people make the mistake of undervaluing and underinsuring their possessions, soalways be as accurate as possible when you estimate the value.
If you own a car this is another area where basic cover is not always enough. The law insists that you have basic motor insurance if you drive but you may consider increasing your cover, for example to replace a written-off car.
When you have recognised which insurances you require, it is important to compare like for like quotes from different companies, but do not buy on price alone, check what it covered and what is excluded.
To ensure peace of mind, with so many policies on offer it is always advisable to consider professional financial advice before agreeing to any policy.
Fraser Brydon - Money Matters