Learn About Life Insurance

By Bill Brown, Sales Manager, Your Mortgage Team

It can seem weird thinking about what would happen if you died suddenly, but one thing's for sure, whoever is left behind - children or grandchildren, a partner, parents, brothers and sisters, colleagues or friends - somehow, eventually, life for them goes on.

That said, the loss of your income, may mean financial life may NEVER be the same.

Of course, it's not only death that can threaten or even destroy an otherwise bright financial future.

Becoming seriously ill, suffering a major accident, or even being made redundant all have significant consequences.

It is all about income, well actually, the lack of it - when death or illness strikes a family unit, the resulting loss of income can make an already difficult life impossible. That said, it is important to remember that even if you do not provide an "income", your input is no less important to your family, and the cost of replacing a "home-maker" is significant.

The Legal and General 'Value of a Mum' survey in 2004 calculated that a mum is worth £21,184 a year! Assuming only a 3% cost of living increase means that in 2006, the value of a non-earning spouse could be £22,500!

The generic term for protecting your lifestyle is, strangely enough, "Lifestyle Protection", and the many products available to keep you secure revolve around providing lump sums or income in the event of three "perils" -

• Death
• Incapacity - Illness or an accident
• Unemployment

I have heard the need for lifestyle protection discussed in many forums, but a particularly effective way to understand how necessary it is was used in some work I did with ASDA a number of years ago -

"SPECIAL OFFER - cash machine installed in front of your TV every Friday evening. Simply press red button on remote control provided, put feet up, and withdraw weekly wages - in event of breakdown, wages will not be paid - Breakdown Insurance Highly Recommended"

Enquiries revealed that the cash machine was of course, human - you are your own cash machine, and if you break down, your wages will not be paid! How Frustrating!

Arranging suitable, affordable protection can provide you with peace of mind that you and your dependants will not have to face choosing what bills not to pay should life not go according to plan.

This guide will tell you how to understand what cover you need, and what type of policy might be suitable.

• Staggering facts
• Do I need it?
• What's covered?
• Types of Protection policy
• What's excluded?
• Making a claim

Staggering Facts

According to the Association of British Insurers 2005 UK Insurance Key Facts Report (link to PDF 62Kb) www.abi.org.uk

Percentage of Households Purchasing Cover
Home Contents	77%
Motor	72%
Home Buildings	64%
Life Insurance	47%
Mortgage Protection	21%
Personal Pension	15%
Medical	11%
Income Protection	2%

We have to have Buildings Insurance if we have a mortgage, and contents are simply common sense.

We spend hundreds of £'s a year insuring our cars, vans and motorbikes, pets and household goods, the value of which is generally much less than your income over even a relatively short term. Income which is of course needed to buy these assets in the first place!

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Do I need it?

Protecting against DEATH - (generally referred to as "life" cover)

In general, if you are obvious, there is not an immediate need for life cover, although many single clients take life cover if they still feel they want their assets to pass to family without any debts attached to them. Also, if you read on and feel critical illness cover would be sensible, then it may well be that the cost of life cover on the same policy is only marginally extra, and this may well come in useful when you do move into a relationship with someone who relies upon your income for their future security. The cost of insurance rarely comes down over the years, as you get older, so a reasonable amount of foresight when planning your protection portfolio can make sense!

These questions should help you understand if you need life cover - think about your lifestyle carefully before answering!

One thing to always bear in mind is that losing the "home-maker's" input throws up many difficulties most clients don't think about -

• Who would take care of the children?
• Could I rely on family to replace this input?
• Would the remaining partner be able to continue working as they do now?
• What about the housework?

In my experience, to keep a family and household stable and running requires the full input of both parents in many different ways, and removing any of this can be a huge problem. Think about your family schedule, and then remove one of you from the picture...!

Do I need Life Cover?

Q	If I'd died yesterday, would I want to make sure my mortgage and any other loans could be fully repaid?
Q	Would my partner struggle to cope without the input I have in our day to day lives?
Q	Would I need to make sure the income which I'd been providing continued?
Q	Even including any "Death in Service" or "Spouse's Pension", would my family still receive substantially less income than I currently provide?

You should ask these questions of your partner if applicable, as quite often, they can see their own struggle without your income or input very vividly indeed!

If the answer to any of the above is "YES", or "Not Sure", chances are you need life cover, and the only remaining questions are how much, what type of plan(s), and for how long should they run?

Illness or Accident

Regardless of your relationship status, if you have an income, it will most likely stop sooner or later if you are off work ill, or after an accident.

The state provides some financial support - http://www.dwp.gov.uk/, but as an example, you are entitled to £70.05 if you are working and earning more than £85 per week*.

These questions should help you understand if you need to protect yourself against these perils, and whilst I refer to being ill, it still applies to an accident!

Q	How much will my employer pay me whilst I am off work, and for how long will they pay me?
Q	When they stop paying me, how long will my savings last and am I prepared to use them up to pay my bills?
Q	Who else can I rely upon to help me out and how long would I be able to rely on their support?
Q	Could my partner/family cope if my income stops?
Q	Do I want to be making a choice about what bills I can and can't afford to pay just because I can't work?

For Homemakers

Q	How would my input be replaced - what would it cost to replace me, and where would we get the money?
Q	If my partner needed to take time off work to care for me, how would that income be replaced?

Once again, discuss these questions with anyone who would be affected by them, including whoever you think is going to bail you out if you need it!

It is VERY rare for clients to remain secure if they are ill - as it brings with it so many other related problems and worries. Employers can rarely afford to take care of your income long term.

You might be thinking......

We quite often hear single (generally younger) clients say "I'd just go back to my parents", or "my folks would help me out". Whilst I'm certain parents will always do whatever they can for their children in need, is it really fair to be asking them to pay your mortgage and bills for you, assuming they have that much disposable income. Also, remember that they have a present lifestyle and future too. You ought to be able to stand your corner on your own!

"I never get ill" - that's great, and if you are certain you never will be, then good luck! The reality is we never know what is round the corner, and you must balance the reality of a life without income against the likelihood of being ill or suffering an accident, and decide if you are worried enough to protect against it.

In a worst case scenario, it adds insult to injury (excuse the pun), if you have to sell your house, car, furniture etc. because your life takes an unforeseen turn. Much better to have your assets secured, giving you breathing space to get well, and return to normal as soon as your health allows it.

At the very least, get a quote from us and talk through the options!

Unemployment

This is not as cut and dried as the above, which in general a need can be identified through a serious of thought provoking questions. Whilst mortgage payments, and perhaps associated costs, can be protected against redundancy, whether the premium is worth paying depends largely on how you feel about -

• The likelihood of you losing your job
• The circumstances in which you might lose it
• Your employment status - i.e. full time, contractual, self employed?
• The likelihood of you finding work relatively quickly
• Whether you would simply have to find ANY work, and quickly, as just having enough money to pay your mortgage would not keep you secure in the first place.

Issues such as your individual skills, employment history, age, and market for your attributes, all have a part to play in the decision on taking Unemployment Cover, and we can help you weigh up the pro's and cons as part of your strategy, and advise on the cost.

Now let's take a look at some of the generic solutions available -

What's covered?

The different types of insurance policy usually cover one or more of the following: -

• Death of the life assured
• Terminal illness affecting the life assured
• Critical illness affecting the life assured
• Ill health or injury of the life assured
• Unemployment of the life assured

Many Insurance policies can be taken on a joint basis, with one lot of cover for both parties, but whether to arrange one single policy each, or a joint policy should be discussed with one of our team - you can often get double the cover for only slightly more then the cost of a joint policy. This is particularly important with Critical Illness cover as one joint policy may only provide £25,000 worth of "Children's Cover", whereas 2 single policies will provide £50,000. This is where the advice of one of our team can provide real added value to your protection planning.

It's also very important to shop around - one Insurer might be the best or cheapest for one type of cover, but another may excel in a different area. Where critical illness is concerned, cost must be balanced with quality to be certain that you get good value, but that the policy has an extremely comprehensive range of illnesses covered, and that the definitions of the illnesses are as favorable as possible should a claim arise.

Some Insurers now offer "menu" policies, where numerous different types of cover can be bundled together for a cost effective solution, rather than having a number of policies with a number of insurers for your protection portfolio.

We source our products from a vast selection of quality insurers in the UK, and can recommend a solution tailored to your needs, preferences and budget.

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Types of Protection Policy

There are several different types of life insurance available, one or more of which will suit your requirements:

• Term Assurance
• Income Protection
• Critical Illness Insurance
• Whole of Life
• Health Insurance

Term Assurance

• Cover guarantees to pay out the policy benefits on the death of the life or lives assured within a given period or 'term'.
• If the life assured lives to the end of the term then no benefit will be paid
• It's worth matching the policy term with the amount of time you need cover for, for instance, the number of years until your children are financially independent, the number of years remaining on your mortgage, or perhaps the time until retirement, after which you should be secure with Pension Income etc.
• It is not an investment, however, it is a low cost form of life insurance
• Normally has Terminal Illness included
• Can have Critical Illness included as an option

There are 3 main types of term assurance:

1. Level Term Assurance

• The amount payable on death does not reduce - it can either remain unchanged throughout the term of the policy, for example if it is covering an interest only mortgage or specific lump sum need, or the sum assured can be "indexed", so it will increase each year to maintain it's buying power as the cost of living increases.
• Premiums tend to be relatively low
• The funds paid out can be used for any reason should you die
• The Benefit is paid Tax-Free

2. Decreasing Term Assurance

• This tends to be the cheapest form of life cover
• For every year that you live the sum assured decreases, until the end of the term when it becomes zero
• It is commonly taken out with repayment mortgages, as the sum assured reduces roughly in line with the amount of capital you owe on your mortgage

3. Family Income Benefit

• These are designed to provide an income rather than a lump sum. In general they are very effective, as where you can identify what income would be lost on death or critical illness (if included); it is easy to match the policy benefit to this need.
• A low cost method of replacing income with an income on death, or critical illness as an option.
• Policies can be arranged so that the benefit level chosen is "indexed", i.e. increases each year to keep pace with the cost of living. In this case, whilst it is in force both the sum assured and the premium will increase each year and if it needs to pay out, premiums would cease, but the benefit would continue to increase in each year of payment. Alternatively, the benefit can be set at outset, and would remain at this level throughout the policy term. Generally, indexation is a sensible inclusion.
• Should a claim be made, most polices allow the benefit to be switched to an initial lump sum.
• These can be taken in sole names or joint.
• Arranged for a specified term generally linked to the period within which a need for replacement cover exists. This is normally the period of children's dependency, or perhaps when you or your partner will retire.

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Critical illness

• Critical illness policies pay out a lump sum if you are diagnosed with any one of a number of specified illnesses, such as a stroke, heart attack or cancer
• Advances in medical science means many people who experience one of these illnesses no longer die, but rather make a good recovery whilst not being able to return to a normal life, working or otherwise. The effects on the family can be severe, as the care required after such an illness means neither partner can work, thus often losing all income. Single people can also find themselves in severe difficulties as the cost of maintaining their independence in these circumstances can be significant.
• Terminal illness and Children's Critical illness cover are usually included automatically.
• This policy can be taken out in joint names; however the plan would only pay out once.
• These policies can be taken on their own, only covering critical illness, or life cover can be included as well.

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Income protection

• This provides a replacement income if you are unable to work due to any illness or an accident, and you can choose the level of benefit, up to a maximum of 60% (depending on insurer) of your Gross pre-incapacity earnings
• The illness does not have to be "critical", meaning they can often be more useful in protection planning than Critical Illness only cover.
• Your income can be set to start after any one of a number of "deferred periods" ranging from 4 weeks to 52 weeks, and this would generally be linked to when your employer stops paying you, or when any savings you would be prepared to use would run out.
• Once a claim is paid, income can be paid until you return to work, die or until the policy term ends, whichever happens soonest
• A key benefit of this type of policy is that it could take care of not only your mortgage, but the majority of your other bills too, keeping you as secure as possible.
• It can also provide hospitalisation benefit for more than a week and continue to provide cover during a career break.
• The benefit is payable tax-free

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Whole of Life

Whole of Life Cover guarantees to pay out a minimum sum in the event of your death

• People often take out this kind of policy to provide against inheritance tax or to provide for a spouse.
• The premiums are rarely fixed - they are subject to review and may rise
• Since these policies always pay out, the insurance provider generally builds an investment element into the policy. This allows for benefits to be preserved some years after payments cease, or can be taken in cash by the life assured.
• We do not provide whole of life cover, but include details for reference, and where a need is identified, we can refer you to a specialist.

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Private Health Insurance

• This policy is designed to cover the costs of treatment of curable medical conditions arising after joining the plan
• The policy typically covers hospital charges, such as consultations and theatre fees, Specialist fees, Ambulance and nursing fees and day care treatment
• You can normally renew a Health Insurance policy on an annual basis. Cover is sometimes available through employers, who sometimes offer a discount on the premium.
• Low cost and budget policies are also available which limit the level of treatment available.

Mortgage Payment Protection Insurance (MPPI) - also known as Accident Sickness &Unemployment (ASU) policies

These policies provide benefit in the event of, yes you guessed it, Accident, Sickness or Unemployment. You can also take policies which do not cover against unemployment for clients who do not see this as a concern, or for Unemployment Only.

Generally -

• Benefits would normally equal a mortgage payment amount, plus perhaps 25% for associated costs, but there are policies with higher benefit levels if required.
• Any accident or illness which caused you to be off work would qualify for a claim, rather than just Critical Illness.
• Unemployment Cover has a number of terms and conditions attached to it.
• You qualify for benefits after 30 or 60 days (depending on the provider and policy), of an event which qualifies for a claim, but the payout may be backdated to Day 1.
• Once a claim is paid, benefits can be paid up to 12 or 24 months, depending on the cover and provider chosen.

These policies can be useful, however, they are restrictive in the cover they offer, as generally they only pay out sufficient to cover your mortgage and related costs, and as they only generally pay out for a limited number of months, they do not provide long term financial security.

Also, if your employer already pays you full pay for a period of absence due to illness or accident, as you would be no worse off in this period, paying for cover like this may be poor value. You may be better of with a solution like PHI (see above), with some stand alone Unemployment Cover if this aspect of life concerns you.

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What's excluded?

Life and Health Insurance policies have a variety of common exclusions - such as pre-existing medical conditions, age restrictions, occupational or dangerous pastimes, certain illnesses and diseases, and unusually large sums assured.

All policies need to be "underwritten" by the insurance company recommended to find out whether you can be covered and on what terms. Many factors are considered when underwriting such as height, weight, smoker status, present health, occupation and any previous medical problems. In some cases, we can advise whether you are likely to get cover if you have any concerns about these exclusions, but generally, the best course of action is to agree what cover is needed, apply for it, and wait to see what terms are offered - in general, limited or restricted cover is better than none at all if a need clearly exists, and it is best to identify needs early and accurately, so you are insured properly should you face one of the perils!

Please ensure that you have discussed these exclusions with your advisor or provider.

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Making a claim

If you fall ill, have an accident, or find yourself made redundant, you need to know how to make a claim to ensure you receive payment quickly and according to the terms of your policy.

Contact your provider as soon as you need to make a claim to prevent any delay. The provider will normally send you a claim form to complete and return along with any further evidence that they may need, such as proof of the death of the life assured or their illness.

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Our Services

We only deal with "Term" Insurance policies, and there is never any surrender values paid at any time for any of the policies we arrange.

Useful Links -

ABI - http://www.abi.org.uk

Have you counted the cost of losing Mum?
Every Investor Article - Thursday, February 02, 2006
http://www.everyinvestor.co.uk/timArticles/tim_547_85_.asp?no_pop_t=1

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