Take cover with mortgage protection
The credit crunch continues to bite and redundancies and repossessions are on the rise, meaning more of us are feeling pain on the financial front. The statistics certainly make harrowing reading. Figures from the Office for National Statistics show that 1.67 million people were unemployed in the UK at the beginning of June 2008, 60,000 up on three months earlier.
And this figure’s likely to rise: a survey by KPMG and the Chartered Institute of Personal Development found that 27% of the 1,200 employers surveyed were planning redundancies - up from 22% in the second quarter of 2008.
With more people losing their jobs, the number of repossessions is also on the increase. According to the Ministry of Justice, 28,658 repossession orders were made in England and Wales in the second quarter of 2008 - 24% more than the same period in 2007. While some of these orders might not lead to repossession, the Council of Mortgage Lenders has reported an even sharper increase in homes actually being repossessed.
In the first six months of 2008, 18,900 homes were repossessed, up 48% on the same period last year.
Putting in place protection could help you weather these uncertain times. But accident, long-term illness and the death of a loved one can also have long-lasting implications for your financial security, whatever the state of the economy. Figures from the British Heart Foundation, for example, show that one in three of us will suffer a heart attack, cancer or a stroke.
Although the state will provide you with some support, you probably won’t be able to maintain your lifestyle - unless you live very frugally.
Jobseeker’s allowance, for example, is just £60.50 a week (£47.95 if you’re under 25). If you’re unable to work you’ll receive £46.85 a week in income support, with additional payments for dependent children. Or, if you meet the criteria for illness or disability, you could receive between £63.75 and £84.50 a week in incapacity benefit, depending on how long you’ve been claiming.
Fortunately, there are several insurance products you can take out to protect yourself from the unexpected. The most basic type of protection is life assurance. This pays out a lump sum if the insured person dies during the term of the policy.
"If your death would leave someone facing financial problems then you should put some life assurance in place," says Matt Morris, policy adviser at independent financial adviser LifeSearch. "There’s no golden rule about how much you’d need, but you should think about how much your dependants would need if you weren’t there."
It’s cheap too, especially if you’re young and don’t have any major health problems. For example, a 25-year-old man could buy £100,000 of cover over a 25-year period for less than £6 a month.
Although the concept of life assurance is straightforward, there are a number of variations that may be more appropriate for you. If you’re using life assurance to protect an outstanding mortgage debt, decreasing term assurance may be worth considering as the payout drops in line with the mortgage debt.
"Depending on your age and the sum assured, you could take up to 60% off the premium for a level life assurance policy," says Trevor Bailey, marketing director for protection at Norwich Union. "However, where premiums are low, many people prefer to pay the extra as they’d get a higher payout."
Family income benefit is another option. Rather than paying a lump sum, this pays a monthly income for the remainder of the term. "It’s often overlooked, but this form of life assurance is great for providing an income to bring up children," says Chris McFarlane, head of protection at LV=. "And because the potential payout is smaller, it’s cheaper too."
Another variation is a joint life policy. But, although this can be cheaper, it often represents worse value than two single life policies - a joint life policy would only make one payment, while two single life plans could make two. Likewise, if you split up, you’d need to put new cover in place, and this would be more expensive as you’d be older.
Critical illness insurance
Critical illness insurance works on the same principle as life assurance, but rather than pay a lump sum on death, it pays out if you are diagnosed with a serious illness such as a heart attack, stroke or cancer during the term of the policy. "This can be a better option than life assurance, especially if you don’t have any financial dependants," says Bailey.
It’s more expensive than life assurance, though, as your chances of contracting a serious illness are much higher than dying prematurely. For example, while a 35-year-old man would pay £9.19 a month for £100,000 of life assurance over 25 years, the premium for the same amount of critical illness cover is more than four times this at £41.16.
"Think about reducing the critical illness cover if this is too expensive," advises Trevor Bailey. "You might recover from a serious illness, so it’s not so important to clear all your debts and provide for your family."
Income and mortgage cover
Next are the insurance policies that provide an income in the event of long-term illness, accident or, in some cases, unemployment. Income protection pays a replacement income if you are unable to work as a result of accident or long-term sickness. It will pay out until you retire or are fit enough to go back to work.
Alternatively, mortgage payment protection insurance (MPPI), also called accident sickness and unemployment, will pay a set amount for one or two years if you can’t work because of illness, injury or unintentional unemployment, such as redundancy.
"Income protection should be top of your protection wish list," says Matt Morris. "There are fewer exclusions. For example, stress and back problems are the most common causes of long-term absence, but are often excluded on MPPI. With income protection, payment can potentially last much longer and it’s competitively priced - it’s often cheaper than MPPI if you’re young."
For example, while a 35-year-old man can get £1,200 of MPPI for £14.04 a month from Getmy.com, he can get the same level of income protection for less than £2 a month more (£15.90 a month) from Pioneer Friendly Society.
Should you still want unemployment cover, you can buy this on a standalone basis from many MPPI providers.
When it comes to buying MPPI, Simon Burgess, managing director of British Insurance, says it pays to check there aren’t too many restrictions. "A long qualification period, such as 90 days, can be difficult to get through without any money," he adds. "Some policies have back-to-day-one cover, which means you’ll be covered from day one and you’ll get your first cheque at the end of 30 days."
A few exceptions
There are also instances when some of these policies simply aren’t worth having. "If you’re self-employed, a temporary worker, on a contract or have more than one job, it’s not worth taking out unemployment cover because you’ll never qualify for a payment," says Burgess. "And, if your employer had already announced a redundancy programme before you took out the cover, even if you haven’t been singled out for it, most MPPI plans won’t cover you if you’re made redundant later."
Another point to bear in mind, whichever policy you decide on, is that you need to tread carefully when taking out anything that pays an income if you’re unable to work because of sickness or an accident. You’re not allowed to receive more in benefits than if you’d been working, so if you’re employer provides some form of cover make sure you don’t duplicate it, as the additional premium will be a waste of money.
An independent adviser
With all these protection products, the way you buy them can make a huge difference to the price. "Unless you understand exactly what you want, see an independent adviser," says Chris McFarlane. "They’ll be able to tell you what you need and recommend the most appropriate cover. Policies do vary a lot, so it’s worth getting advice."
For MPPI, it also pays to shop around. "Do buy independently rather than from your bank or mortgage lender," says Burgess. "The average monthly cost per £100 of benefit is £6 from the lenders, while we price it at £1.60."
Many banks have been accused of mis-selling these policies, so don’t feel pressured. Do your research and consider all your options before making your choice.
If the cost of fully protecting yourself against every eventuality is too expensive - even with an adviser trimming the premiums for you - don’t let this deter you completely. "Some cover is definitely better than none," adds McFarlane. "Look at your monthly outgoings and consider what’s important. If you don’t have to worry about how the mortgage and bills will be paid when you’re ill, then that’s protection worth having."
Make sure your claim gets paid
A poor track record on claims payments has put many people off taking out critical illness insurance. But, if you have a plan, or would like the peace of mind it gives, there are ways to make sure that, if you need to claim, it will be paid.
"Tell us everything when you apply," says Bonnie Burns, protection marketing manager at Legal & General. "One of the main reasons claims are declined is non-disclosure." This is where the claimant hasn’t provided an important piece of information that affects the validity of the claim - for example, if you don’t tell the insurer you’ve had high blood pressure or cholesterol levels and then go on to have a heart attack.
The industry is making it harder to inadvertently do this; many of them now use a sophisticated underwriting technique, ‘tele-underwriting’, which drills down into the details you provide to get the low-down on your health.
"Last year, we paid 88.2% of claims, up from 83.3% in 2006, and the percentage declined for non-disclosure fell from 12.1% to 7.7%," explains Burns. "This is good as we do want to pay genuine claims. But, if you’re at all worried, you could get a GP report to be sure you don’t forget anything. Also, if you’re concerned that you didn’t tell us something important when you took out a plan, tell us now. It’s better to have your premium amended if necessary than pay for cover you won’t be able to use."
Term assurance provides cover for a fixed term with the sum assured payable only on death. Term assurance premiums are based primarily on the age and health of the life assured, the sum assured and the policy term. The older the life assured or the longer the policy term, the higher the premium will generally be. There are generally two types of term assurance. Level term assurance premiums are fixed for the duration of the insurance term and a payment will only be made if a death occurs during the insurance period and with decreasing term assurance, life cover decreases during the insurance term reducing the cash payout the longer the term runs and this is reflected in the premium.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
Critical illness insurance
This cover pays out a tax-free lump sum if you become seriously ill. All policies should cover seven core conditions: cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. You must normally survive at least one month after becoming critically ill, before the policy will pay out. Payouts are determined by premiums and premiums are determined by the severity of your illness, the less severe the lower the premiums.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.