Protection planning for peace of mind
Good financial planning is not only about exposing your money to greater growth potential. It’s also about ensuring your wealth can weather life’s unexpected storms, so that you (or your loved ones) can maintain their lifestyle no matter what happens.
This type of protection typically provides a tax-free lump sum that will be paid to whoever you designate should the worst happen to you. There are four main types of cover:
Writing a policy in trust
While taking out cover is likely to be a savvy decision, care needs to be taken to ensure it’s done properly. For example, if it’s not set up in the right way, when your loved ones receive a lump sum from your life cover, it may become liable to Inheritance Tax (IHT).
As IHT is typically charged at 40%, this could significantly reduce the amount your beneficiaries receive, which may jeopardise their financial security. One way you might be able to protect your life cover from an IHT liability is to place it in a trust.
Not only could this mean the payment sidesteps IHT, it could help ensure your loved ones receive it more quickly. AFH Trusts and Estate Planning Services could help you understand whether you need to consider a trust, and the options available. For more information, please read our guide.
Income protection could help you to maintain your standard of living if you’re off work for an extended period of time due to a serious illness.. It pays a tax-free amount every month if you’re unable to work, which could help you to meet your financial commitments, such as your mortgage repayment.
Critical illness cover
Critical illness cover (CIC) pays a tax-free lump sum if you’re diagnosed with a serious illness. The illnesses you would be covered for depend on the protection policy you take out, although it usually covers cancer, a heart attack or a stroke.
The money you receive can be used to:
- pay for treatment (which could include medication not available on the NHS)
- repay debts, which may help to reduce your monthly outgoings while you cannot work
- modify your home if necessary
- generate an income while you’re off work. This could mean that you don’t have to rush back to work due to financial pressure before you’re fully recovered.
Having CIC means that you can rest easy that you will be better placed to maintain your lifestyle no matter what happens.
You could arrange for your cover to be for a specified time, up until you return to work, or when you retire. You can typically defer payment of the protection plan, and the longer you defer it for, the less you’ll usually pay.
Depending on your circumstances, CIC may be less expensive than you think, although the cost will depend on several factors including:
- your health
- your age
- your occupation
- the income you require.
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 impairment or disability.
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.
Your adviser can guide you through the process, and help find the right cover options for you.
Please note: whichever type of cover you decide on, you will not normally get cover for pre-existing conditions.