There is currently a £2.3 trillion protection gap in the UK, with millions of people putting their family and financial obligations at risk should they die or be unable to work.
This risk is only heightened by the current financial situation and, with unemployment and the cost of living both continuing to rise, it has never been more important to review the amount of protection you have.
Legal & General has highlighted several key life stages when individuals should consider their protection needs.
Bonnie Burns, protection marketing director at Legal & General, says: “People may not realise that they could put their families under enormous financial pressure if they were to die or get ill because bills still need to be paid.
“If people find that their budget restricts the amount of protection cover they can take, then at the very least mortgage debt and bills should be covered. Some protection is better than none.”
1. Starting a new job
When you start a new job your most pressing concerns are likely to be settling in and when your first pay is due, but this is also a good time to think about income protection.
According to recent research from the Yorkshire Building Society, most people would only have £1,000 to live on if their income stream disappeared. To make matters worse, nine out of 10 people have no form of income protection insurance to cover their bills if they were unable to work or lost their job.
However, when it comes to buying income protection, it’s worth seeking independent advice rather than just opting for a policy from your bank to ensure you don’t pay over the odds. Remember also to go for the most comprehensive cover rather than the cheapest.
2. Buying a house
A property is likely to be the most expensive thing you ever buy, and the chances you will pay for it with a mortgage. Which is why, when you do get on the property ladder, you should consider taking out a protection policy to cover your debt should you be unable to work because of illness or redundancy.
Legal & General suggests homeowners consider taking out income protection, which pays a replacement income if you suffer a long-term illness, accident or, in some cases, unemployment.
But you could also opt for life assurance, which pays out a lump sum if you die; critical illness cover, which pays out in the case of serious illness; or mortgage payment protection insurance, which pays a set amount for a period of time if you can’t work.
Experts say income protection should be top of homeowners protection priority list as there are fewer medical exclusions and payments can potentially last for longer.
3. Getting married
Couples that tie the knot should, alongside planning the wedding and honeymoon, also plan to take out life insurance, says Legal & General. This type of protection tends to be relatively cheap, but it only pays out if one of you dies and won’t protect your income should you be unable to work because of sickness, an accident or unemployment.
4. Starting a family
While life insurance pays a lump sum upon the event of your death, family income benefit pays a regular, tax-free monthly income to your dependents from the time of the claim to the end of the plan term. The advantage of this product is that a regular monthly income can be more attractive to families who don’t want the complexity of investing a lump sum payout. Premiums can also be cheaper than life insurance.
5. Expanding family/moving to a bigger house
As your life circumstances change, so should your protection plans. If you decide to expand your family and/or move to a bigger house, then remember to review any existing family income benefit, life insurance and critical illness cover.
If, down the line, you and your partner divorce then it's important you again review your family income benefit to cover maintenance payments.
You should also review any joint policies and take action accordingly.
7. Approaching retirement
People approaching retirement often find their need for protection reduces, and therefore should take the time to review their existing policies. For example, if you’ve paid off your mortgage then you may find you have less need for life insurance.
It you want to mitigate inheritance tax then a whole of life policy could help, so speak to an independent financial adviser about your options.
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).
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
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.
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.