No one likes to think about it but death is the one certainty that we all face. Planning ahead can give you the peace of mind that your loved ones can cope financially without you and, at a difficult time, helps remove the stress that monetary worries can bring.
Careful planning can ensure your needs will be met whatever your circumstances
We may not like to think about it, but a growing number of us will need long-term care when we’re older. If you’ve got elderly parents you may need to pay all or part of their care costs. The time when an elderly person needs to go into residential care is often a huge strain on family members. Illness or infirmity may have forced a sudden change in circumstances and time may be short.
Protecting your income should be taken very seriously, given the limited government support available. Income protection insurance, formerly known as ‘permanent health insurance’, is a financial safety net designed to help protect you, your family and your lifestyle in the event that you cannot work and cope financially due to an illness or accidental injury preventing you from working. Most of us need to work to pay the bills.
You really need to find the right peace of mind when faced with the difficulty of dealing with a critical illness. Critical illness cover is a long-term insurance policy designed to pay you a tax-free lump sum on the diagnosis of certain life-threatening or debilitating (but not necessarily fatal) conditions, such as a heart attack, stroke, certain types/stages of cancer and multiple sclerosis. A more comprehensive policy will cover many more serious conditions, including loss of sight, permanent loss of hearing and a total and permanent disability that stops you from working. Some policies also provide cover against the loss of limbs.
Whole-of-life assurance policies provide financial security for people who depend on you financially. As the name suggests, whole-of-life assurance policies remain in force right throughout your life. This means the insurance company will have to pay out in almost every case and premiums are therefore higher than those charged on term assurance policies.
There are different types of whole-of-life assurance policy – some offer a set payout from the outset, others are linked to investments, and the payout will depend on performance. Investment-linked policies are either unit-linked policies, linked to funds, or with-profits policies, which offer bonuses.
Whole-of-life assurance policies pay a lump sum to your estate when you die. This could be used by your family in whatever way suits them best, such as providing for an inheritance, paying for funeral costs and even forming part of an Inheritance Tax planning strategy.
Some whole-of-life assurance policies require that premiums are paid all the way up to your death. Others become paid-up at a certain age and waive premiums from that point onwards.
Whole-of-life assurance policies can seem attractive because most (but not all) have an investment element and therefore a surrender value. If, however, you cancel the policy and cash it in, you will lose your cover. Where there is an investment element, your premiums are usually reviewed after ten years and then every five years.
Whole-of-life assurance policies are also available without an investment element and with guaranteed or investment-linked premiums from some providers.
Reviews
The level of protection selected will normally be guaranteed for the first ten years, at which point it will be reviewed to see how much protection can be provided in the future. If the review shows that the same level of protection can be carried on, it will be guaranteed to the next review date.
If the review reveals that the same level of protection can’t continue, you’ll have two choices:
Increase your payments
Keep your payments the same and reduce your level
of protection
Maximum cover
Maximum cover offers a high initial level of cover for a lower premium, until the first plan review, which is normally after ten years. The low premium is achieved because very little of your premium is kept back for investment, as most of it is used to pay for the life assurance.
After a review you may have to increase your premiums significantly to keep the same level of cover, as this depends on how well the cash in the investment reserve (underlying fund) has performed.
Standard cover
This cover balances the level of life assurance with adequate investment to support the policy in later years. This maintains the original premium throughout the life of the policy. However, it relies on the value of units invested in the underlying fund growing at a certain level each year. Increased charges or poor performance of the fund could mean you’ll have to increase your monthly premium to keep the same level of cover.
There are various ways of providing for your family in the event of your premature death, but term assurance policies are the simplest and cheapest form of cover. The plans have no cash-in value or payments on survival as their design is limited to protecting your family. However, you could also use term assurance in relation to estate planning and for the payment of mortgages or other debts.
Making sure you have the correct amount of life assurance will enable you to protect your loved ones from having to deal with your financial burdens. That’s why obtaining the right advice and knowing which products to choose – including the most suitable sum assured, premium, terms and payment provisions – is essential.