How protection insurance could save you thousands
When it comes to long-term illness, disability and unemployment, it's easy to think "it'll never happen to me". But there's never any knowing what surprises life might throw at you, making it vital to protect your finances and debt - particularly in these tough economic times.
Many people mistakenly believe the state will support them through sickness, incapacity or redundancy, but basic benefits do not allow the vast majority to maintain their standard of living, and these benefits will get even less adequate as the government continues to tighten its purse strings.
This is why it is so important to have a back-up plan in place. There's a range of protection insurance policies that can act as a safety net. They can seem costly and confusing - making it tempting to consider going without - but not having cover in place could prove a false economy if something does go wrong.
Here, three recent claimants explain how their protection policies proved to be a lifesaver.
CRITICAL ILLNESS INSURANCE
Critical illness cover provides a tax-free lump sum, payable if you contract one of a list of specified conditions, such as cancer or a stroke - or if you become permanently disabled.
It offers a financial 'cushion' at a stressful time, and people often buy this cover to pay off a mortgage or cover medical expenses. It is often sold alongside life cover.
You must usually survive for a specified period of time (typically a month) after becoming ill, before the policy will pay out (it will only do so for serious illness, not an accident, injury or stress).
According to protection broker LifeSearch, a 35-year-old non-smoking male would pay £31.84 a month for a PruProtect policy for £100,000 of critical illness cover with life insurance over a period of 25 years.
Case study: Tim Briggs, 50
Tim Briggs, managing director of his own business and father of four grown-up children, knew that it was important to protect himself financially - particularly as he's self-employed - but never really believed anything would happen to him.
Tim, who lives in Hampstead Heath in north London with his wife, took out critical illness cover with LV= in 2001. "At the time, I exercised regularly, had a healthy lifestyle, never needed to visit the doctor and rarely took days off work," he says.
However, in February this year, Tim was rushed to hospital after collapsing. He had suffered a serious heart attack and required three large stents to be fitted to keep his arteries open.
"It was all so unexpected," he says. "After the diagnosis, my family was left shocked and devastated. But after spending some time in hospital, thankfully I started to recover.
"We were so glad that our financial adviser had recommended critical illness cover. This made a real difference to us being able to cope financially, as the pay-out reduced the pressure of having to get back to work full-time. This was an absolute godsend at what was a very difficult time."
Tim is now back at work on reduced hours while he recovers. "I do feel fit and healthy, but am now on medication for life, and have to take things slowly while still in the early stages of recovery," he says.
"In the current climate, it's easy to put off taking out protection insurance, but my life would have been very different without it."
This type of cover pays a regular income if you are unable to work due to illness or injury. Typically, it will start to pay out six months after an absence, and continue until you are fit enough to return to work or retire.
It covers conditions such as stress and back problems - two of the most common reasons for long-term absence. It's not to be mistaken for payment protection insurance, which is often limited to 12 months and riddled with exclusions.
Many policies also give financial help with rehabilitation to help you return to work more quickly, and even if you claim and return to work, the policy stays in place, so you can make further claims if you fall ill again.
The easiest type of policy to claim on is 'own occupation' as this will pay out if you can't do your own job - and not just 'any' job.
It can be expensive - although you can reduce the cost by increasing the deferred period, which is the length of time before the cover kicks in.
According to LifeSearch, income protection costs from £50 for £2,000 a month of cover.
For example, a 35-year-old non-smoking male would pay £25.54 a month with Ageas to protect £1,200 a month of income until age 65, with a three-month deferred period.
Case study: Jenny Stafford, 40
Jenny Stafford, from Jersey, suffers from Retinitis Pigmentosa, a disease of the retina eventually resulting in loss of sight.
Jenny, who is single, was originally employed as an executive personal assistant at a large bank, but when her condition led to tunnel vision, she knew she needed help to continue working.
Jenny has an income protection insurance policy with Unum as part of her employee benefits package; it began 13 years ago when she joined the bank.
"I was very glad to be able to take advantage of the rehabilitation support offered by my company's income protection policy," she says. "My employer had already made a number of adjustments to my role, but it was also keen to utilise Unum's expertise on what else it could do to help."
In October 2010, due to her condition, Jenny dropped her working days down to just three a week. She was able to do so with minimal loss of earnings because her income protection plan means she receives 70% of her salary for the two days she doesn't work. "I've moved to a back office role, as a statutory administrator, but really value my independence," she says.
"Without the financial and rehabilitation support from my income protection policy, I would not have been able to keep my job or pay my mortgage and other bills. This would have left me with no choice but to return home to my family in Ireland - leaving behind the independence and support network I have here in Jersey."
Unemployment cover is designed to offer a safety net if you lose your job.
It usually pays out a fixed monthly sum to replace your lost earnings and meet your bills for up to 12 months while you search for a new job.
This type of cover is typically sold as part of a combined accident, sickness and unemployment policy and is sometimes known as MPPI. You can also buy unemployment cover as a bolt-on to an income protection policy.
Premiums are lower than for income protection, but this type of policy only offers limited cover, and can be saddled with exclusions that can make claiming difficult. For example, if your employer has already announced a redundancy programme, you will not be covered.
LifeSearch says unemployment cover would typically cost £11 a month to cover £500 of monthly repayments.
For example, a 35-year-old non-smoking male would pay £32.04 a month for a British Insurance policy for £1,200 a month of unemployment cover for 12 months, with a three-month deferred period.
Case study: Mark Essl, 45
Mark Essl, a married father of two from Barkingside in Essex, knows all too well how vital protection can be after being made redundant in May last year.
Mark took out a mortgage payment protection insurance policy with unemployment cover from Legal & General in February 2009. Then just over a year later, in May 2010, life took an unexpected turn for Mark when he was made redundant.
Although he did get a redundancy package, he was terribly worried about the implications of being out of work.
"I knew it was going to be crucial to get that redundancy money to stretch as far as possible, so I decided to invoke my protection policy," he says. "This money helped me cut my living costs by 50%, as I didn't have to worry about paying the mortgage on our three-bed terrace home."
As a result, Mark's redundancy money went a lot further. "Paying for this protection policy was the single most sensible financial decision I've made in my life," he says.
"You've got so much on your plate when you lose your job, that having a bit of a financial cushion can make all the difference. It took all the worry and strain out of the situation knowing we weren't going to lose the roof over our heads."
Mark returned to work in April this year, and is now a logistics manager for a firm based in north London.
He says: "If you're thinking about cutting back on cover, you need to think very carefully indeed before getting rid of protection insurance; if you default on your mortgage, this will affect your credit rating - and your ability to get credit in the future."
Should you take out cover?
• Before taking out any protection policy, check what is offered by your employer first.
• Examine your own circumstances. What level of risk you are happy with? What cover do you need to be able to keep up financial repayments?
• Consider where you are in life. Are you about to buy a house? Getting married? Have a baby? Different scenarios need different types of cover.
• Seek independent financial advice to find the best policy for your needs.
Tax-free lump sum
An inelegant phrase that is nonetheless accurate in what it describes: a one-off payment to a beneficiary that is free of any form of taxation. Usually received when using a pension fund to purchase an annuity, as 25% of the overall fund can be taken as a tax-free lump sum.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
Income protection insurance
If you can’t work in the event of sickness or illness, income protection insurance aims to give you an income, with the amount of income set by you up to 75% of your gross (before tax) income with the premiums varying by how much of your salary you want to cover, as well as your age and health and when you want to start receive any payouts. Any payouts from income protection insurance are tax-free and usually continue until you recover, reach your selected pension age or the period of cover specified in the policy comes to an end. Income protection insurance does not cover redundancy but you can buy it as a bolt-on.
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.