It’s easy to underestimate our own value. We insure our homes, cars, valuables and pets, but often we forget about life protection, insuring the income that provides all of the above.

What would happen if you were to fall ill, or worse? You’ll want to make sure your loved ones are protected. Planning for your family’s future can bring peace of mind that they will be financially stable and their standard of life secured.

Protection planning can involve looking at life protection, critical illness cover and income protection. An independent financial adviser at AFH can discuss with you the solutions most relevant for your specific needs, and search the whole of the market to find the best possible offers.

Life protection

Taking out a life protection policy can put financial provision in place for your family in the event of your death. Policies need to match your specific circumstances, which means it’s crucial to choose the right term and sum to insure. The cost can vary between providers and change regularly, so it’s worth looking around to find the one that best suits your needs.

Whole-of-life insurance

While a term assurance policy will stop providing cover at the end of the term, the cover from a whole-of-life policy will be maintained as long as you are prepared to pay the premiums, and therefore for the ‘whole of life.’ As the premiums you pay must be maintained for the life of the policy, they will be higher with the whole-of-life cover or reviewed at perhaps 5-year intervals (depending on the policy provider) to ensure the cover is sustainable. How much you pay at the outset will depend on the sum insured, the type of plan, your age and medical history.

Many risks don’t require whole-of-life protection, but for certain planning areas, such as providing for inheritance tax on death, or covering a critical illness that becomes more likely the older we get, they can be very useful tools.

Remember, you can cancel a policy at any time. However, if you do so, there is no guarantee that you will be able to get life insurance in the future, in the event that your health deteriorates.

Term assurance

Term assurance may be suitable if you only need cover for a certain period of time, perhaps until your children have moved out, or the mortgage has been paid off.

You decide on how long you want the policy to last for. If you die during this time, it pays a tax-free cash lump sum to your loved ones. However, if you live beyond the end of the term, your plan will have no cash value. There are different types of term insurance available;

Level-term assurance

With level-term assurance, your policy will pay out the same amount at any time during the agreed period.

Decreasing term assurance

The sum insured reduces over the term of the policy, meaning the pay-out will decrease by an agreed amount each year. This could be suitable if, for example, you plan on paying your mortgage off by a set time.

Equally, you can also purchase increasing term assurance, in which the value of the pay-out increases the longer the policy remains active. An independent financial adviser at AFH will be able to explain the relevance of this option for you, and further discuss your suitability for increasing term insurance.

Family income benefit

This is another form of decreasing term assurance. It’s structured to replace a regular amount of income for a fixed term in order to replace the income lost when someone dies, rather than a lump sum being paid out. As it’s effectively a decreasing-term assurance paying out a regular tax-free income, it’s often cheaper than level-term lump sum insurance and therefore could be useful when you need to keep premiums to a minimum.

Relevant life insurance (Business only)

This is a life insurance policy taken out on your behalf by your employer to provide cover up until your 75th birthday, as a maximum. The premiums are tax-efficient to both the employer and employee, and can be a good alternative to death in service benefits, especially for smaller companies. The benefits are paid out in a tax-free lump sum, with no limits on the amounts that can be insured. Conditions will need to be met to qualify as relevant life with HM Revenue & Customs (HMRC) in order for the appropriate tax benefits to apply. Our experienced financial advisers at AFH will be able to discuss this with you further.

Writing a policy in trust

Putting the benefits paid on death into a suitable trust can be a very useful way of ensuring they are passed on to the intended beneficiaries at the right time. The pay-out also won’t form a part of your estate when considering any inheritance tax liabilities.

While the proceeds of a life insurance policy won’t usually attract income or capital gains tax, under normal circumstances, it will form part of your estate, and may therefore be subject to inheritance tax.

Putting an insurance policy in trust at outset means the proceeds will be paid directly to your beneficiaries in the event of your death, rather than to your legal estate, and will not be taken into account when inheritance tax is calculated.

Critical illness

The thought of becoming ill is an unpleasant one, but it’s important to consider when planning for the future. If you suffer a critical illness and survive, will your family still be able to afford the cost of living?

In addition, you want to feel free to have as much time as you need to recover from your illness, which is often not the case with the financial pressures that loss of income can bring.

Critical illness cover is a type of insurance policy that pays out a tax-free lump sum in the event that you are diagnosed with a specific illness or medical condition during the term of the policy. Factors that will affect the cost of critical illness cover will include the sum insured, your age and medical history.

Specific conditions for critical illness cover

The definition of critical illness, and the conditions covered, will vary greatly depending on the policy. It’s important to understand exactly what a policy covers, as some may not offer a pay-out unless the illness is particularly severe or results in permanent symptoms.

However, not all diagnoses will be included. For example, some policies will not include certain types of cancer as they are considered to be easily treatable. An independent financial adviser can explore all of your options for you, searching the whole of the market to find the policy that’s right for your specific needs and requirements.

Total and permanent disability (TPD)

This is an optional benefit provided by some critical illness policies and covers any condition which results in total and permanent disability, even if the condition is not specified elsewhere in the policy. The definition of disability may depend on your occupation and could include any injury or diagnosis that prevents you from carrying out your work permanently. Your adviser can help to explain this further.

Combining critical illness cover and life insurance

Critical illness cover is likely to be cheaper if it’s purchased alongside life insurance. The important thing to consider here is that, with some policies, there will only be one pay-out, so if you claim for a critical illness, there will not be another pay-out on death.  

If you are unsure about the type of cover you should take out, your adviser can guide you through the process, and help find the right cover options for you.

Income protection

If you find yourself unable to work, how long could you and your family survive on your savings or sick pay from work?

Permanent health insurance is a long-term policy that is designed to pay a regular income should you develop an illness or injury that prevents you from earning. It will continue to pay-out until you are able to return to work, retire, or until the policy ends.

What does income protection cover?

Permanent health insurance will cover most illnesses or conditions; for example, a bad back that leaves you unable to work, whether it is in the short-term or the long-term. However, the cover will vary depending on the type of policy and its definition of incapacity. 

You can decide on the level of cover you want. For instance, the percentage of your gross annual salary you would like to receive if you claimed, how long you would like the policy to pay out for and the deferred period—the waiting time before a policy pays the replacement income, which can often be coordinated with employer sick pay arrangements. You can claim as many times as you need while the policy lasts and because it’s permanent, the insurance company can’t cancel the policy for health or other reasons, so long as you’re prepared to maintain the premiums. In addition, any premium reviews will not reconsider your state of health at the time of review.

Your occupation and the work that you do, your age, health and deferred period needed will determine the right plan for you. This is a complex insurance and if you are unsure about the level of coverage you need, your AFH adviser can search the whole of market for the best offers and help you to select the solution that’s right for you.

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