PROTECTING MY FAMILY

Are your protection policies up to scratch?

  • 06 July 2020
  • 10 mins
  • The world faces an unprecedented health emergency in the Covid-19 pandemic, and no-one knows how many people will ultimately be affected.

  • Everyone with family responsibilities or financial commitments needs to consider how they or their loved ones would cope financially should something happen to them.

The coronavirus outbreak has given a new urgency to the question of how you or your nearest and dearest would cope if something happened to you. According to Professor Stephen Powis, the medical director of NHS England, Covid-19 is the biggest global health emergency in a century. [1] This has caused almost everyone to turn their mind to the ‘what ifs’.

Insurance and assurance

Let’s start with the most well-known of all protection policies, life cover, also known as life insurance or term assurance. This provides your dependents with a lump sum upon death [2].

In the happy event that you survive the term, the policy will expire and the insurer will keep the premiums that you have paid.

These protection policies have no cash-in value at any time. If you don't pay your premiums on time your cover will stop, your benefits will end, and you'll get nothing back. If the benefit amount has not been paid out by the end of the selected term, the policy will end and you'll get nothing back.

Protecting against illness

A little less gloomy than the prospect of your imminent demise is the thought of contracting a serious illness, which would prevent you from working and, thus, from providing for your family and meeting other financial responsibilities. To prepare against such an outcome, you could consider taking out critical illness cover. This is an insurance policy that helps protect you if you become critically ill during the term of the policy.

It pays out a tax-free lump sum that you can use for whatever purposes you wish. This could include covering medical costs, loss of earnings, or monthly expenses. You pay monthly premiums for a chosen number of years, and the policy pays out when you are diagnosed with one of a set list of conditions covered by your policy. These can vary from product to product and amongst the different providers.

Income protection could also cover you for long term illness. Such a policy would aim to replace some or all of your monthly income payments should you be unable to work as a result of a long-term illness or injury. In most cases income protection can provide a broader range of cover.

Something to be mindful of is that there is a deferred period in most policies during which, despite your illness, there will be a waiting time before claim payments begin. Before taking up such cover for yourself and possibly your partner, It’s worth understanding if your employer has not already assigned such a policy on your behalf as part of your benefits package and what your employment sickness pay is as this would impact the validity and how you may wish to set up your income protection.

Protection during unemployment

Insurance for redundancy or unemployment offers similar cover but, as the name suggests, this is triggered not by illness but by the loss of a job. As with long-term illness cover, there is usually a waiting period between redundancy and the first payment. In the current crisis, however, such insurance is becoming rare. Anyone trying to do it themselves through the GoCompare website has been faced with the message: “Lots of insurers aren’t providing redundancy cover anymore because of coronavirus.” [3]

When the market is functioning normally, redundancy insurance provides a monthly income on a proportion of your former salary, usually for 12 months and typically 70 per cent.

But even when this option becomes widely available once more, check your employer’s severance policy before determining whether you think you’ll need cover and to what level.

Protecting your repayments

If you have large sums or long-term borrowing, it is worth considering protecting this to ensure repayments can be covered in the event of a loss of income. Mortgages and loans are the most common types of borrowing that is covered if you don’t have other forms of protection in place that would cover your ongoing repayments. Types of cover that could be considered are income protection, critical illness cover and something called decreasing term assurance. Decreasing term assurance is generally cheaper than level term assurance because the risk taken by the insurance company reduces over time as you pay back the capital of the loan. This means they are likely to pay out less during the period covered and this is reflected in the premiums you pay.

Conclusion

When reviewing your protection needs, it is important to consider all your financial commitments in depth and take an open and honest view of what you and your family will need in terms of protection. How much cover do you need? How long for? A defined period of time or for life? When would you need critical illness or income protection policies to start paying out?

Professional advice could be invaluable in this regard.

Remember that insurance is there to protect you and your family, and to help in unforeseen circumstances. The premiums you pay, therefore, should reflect the level of cover you want to take.

With a competitive insurance market, providers constantly review their pricing and each policy should reflect an individual’s personal profile including your age, lifestyle, desired level of cover and medical history. So compare different policies carefully and try to make like-for-like comparisons wherever possible before committing.

Important information

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.

Fees and charges apply at Schroders Personal Wealth.

In preparing this article we have used third party sources which we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.

Sources:

[1] https://www.theguardian.com/world/2020/apr/25/uk-coronavirus-death-toll-passes-grim-milestone-of-20000

[2] https://www.moneyadviceservice.org.uk/en/articles/do-you-need-life-insurance

[3] https://www.gocompare.com/unemployment-protection/

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