In this short article we will explore the key personal insurance options available to clients and why clients should seriously consider them, if they have no insurance in place or are under insured. We will also explore the differences in the main types of cover.

The main types of cover are life insurance (often referred to as life assurance), critical illness cover (sometimes referred to as CIC or serious illness cover) and income protection. Each type differs slightly, as we will explain below, but all aim to provide financial payment in the form of regular or lump sum amounts to cover regular outgoings, overall liabilities or to provide a standalone lump sum.

CIC and life insurance typically both payout lump sums but serve different purposes. CIC pays a lump sum upon diagnosis of a defined health condition per the terms of the policy. Life insurance pays out if the policy holder dies within the term of the Policy.  (Note – see footnote on level term versus decreasing term cover). Income protection is a long-term insurance policy where you receive a regular income if you cannot work due to accident or illness, until you retire or are able to return to work.

Why choose any of these policies though? A lump sum can protect against a loss of income, cover the value of debts (liabilities) such as a mortgage, credit card or personal loan. CIC can help with similar financial issues but comes into effect if the policy holder is diagnosed with an illness from a list of critical illness conditions. Both are worth considering if you have any dependents who rely on you financially.

Many of us would struggle to manage our essential outgoings, such as mortgage and rent, if we lost an income due to illness or accident. Give some consideration to how your lifestyle would change in the absence of regular income?

Many people are provided with cover via an employee benefits package and these typically include life insurance (commonly referred to as “death in service”) but can also include critical illness and income protection as part of a group policy. In these circumstances, it is important to understand what cover your employer provides, how much the cover is (it is often a multiple of salary) and whether it would provide sufficient cover for your individual circumstances. Of course, if you part ways with that employer voluntarily or otherwise, in most cases, you will no longer have the insurance.

Income protection insurance:

1. Provides regular payments that replace part of your income if you are unable to work due to illness or an accident.
2. Pays out until you can start working again – or until you retire, die or reach the end of the policy term – whichever is sooner.
3. Typically pays out between 50% and 65% of your income if you are unable to work.
4. Covers most illnesses that leave you unable to work – either in the short or long term (depending on the type of policy and its definition of incapacity)
5. Can be claimed as many times as you need to while the policy lasts.
6. There is often a pre-agreed waiting (‘deferred’) period before the payments start. The most common waiting periods are 4, 13, 26 weeks and a year. The longer you wait, the lower the monthly premiums will be.

Life insurance.

There are a variety of reasons why someone might consider taking out a life insurance policy:

1. Financial protection for loved ones: Life insurance provides a financial safety net for your loved ones in the event of your death. It can help replace lost income, pay off debts (such as a mortgage or loans), cover funeral expenses, and ensure your family’s financial stability.
2. Income replacement: If you are the primary breadwinner in your family, life insurance can replace your income and help maintain your family’s standard of living. It can provide funds to cover daily expenses, childcare costs, education expenses, and other financial obligations.
3. Debt repayment: Life insurance can be used to pay off outstanding debts, such as a mortgage, personal loans, credit card debt, or business loans. This helps prevent your loved ones from inheriting these financial obligations.
4. Estate planning: Life insurance can be a valuable tool for estate planning purposes. It can provide liquidity to pay estate taxes, ensuring that your assets can be passed on to your beneficiaries without them having to sell or liquidate valuable assets.
5. Business continuity: If you are a business owner, life insurance can be crucial to ensuring the continuity of your business in the event of your death. It can provide funds for business expenses, buyout agreements, or help facilitate the transition of ownership.
6. Peace of mind: Life insurance provides peace of mind, knowing that your loved ones will be financially protected and taken care of when you are no longer there to provide for them. It can alleviate worries about the future and allow you to focus on enjoying life.
7. Life insurance covers the risk of premature death. It does not typically provide coverage for critical illnesses or medical conditions unless specifically included as a rider or separate policy.
8. Premiums for life insurance tend to be lower compared to critical illness insurance since the risk of death within a specific period is typically lower than the risk of developing a critical illness.

It is extremely important to evaluate your own personal circumstances, financials, and the needs of your dependents to determine the appropriate amount and type of life insurance coverage for your own situation.

Critical Illness Insurance:

1. Purpose: Critical illness insurance provides financial protection in the event you are diagnosed with a specified critical illness or medical condition. It pays out a lump-sum amount upon diagnosis, regardless of whether or not the illness is terminal.
2. Coverage: Critical illness insurance covers a predetermined list of critical illnesses, such as cancer, heart attack, stroke, organ transplant, and others specified in the policy. The coverage is focused on the potential financial burdens associated with the illness.
3. Benefit: The benefit from critical illness insurance can be used for medical expenses, specialized treatments, rehabilitation, debt payments, lifestyle adjustments, or any other purpose you choose.
4. Payout: The insurance payout is made while you are alive and diagnosed with a covered critical illness. It is not tied to your death and is not dependent on the duration of the illness.
5. Premiums: Premiums for critical illness insurance are generally higher compared to life insurance since the likelihood of experiencing a critical illness is higher than the likelihood of death within a specific period.

The primary difference between CIC and income protection is in the payout. Critical illness cover is designed to help you cope financially if diagnosed with a critical illness, specified in your policy, by providing a one-off lump sum. Income protection pays a percentage of the policy holder’s income each month if they are unable to work. The percentage of income and the length it pays out for are agreed at the outset.

CIC payout is not considered an income by the UK government, so the pay-out will not be subject to income tax.

You can get life insurance and critical illness together. It is important to remember that your critical illness cover will only pay out if you have an illness that is listed as one of the critical illnesses on your policy and which meets the definition.

In summary, there is undoubtedly a cost to insurance and the decision for most people of weighing up the cost of the versus insurance versus the value it brings when you need it most.

Footnote – Level Term and Decreasing term insurance.

Level term assurance and decreasing term assurance are both types of life insurance policies, but they differ in how the coverage amount changes over time. Let’s explore each type:

1. Level Term Assurance: Level term assurance provides a fixed and consistent coverage amount throughout the policy’s term. This means that if the policyholder passes away during the term of the policy, the beneficiaries will receive a lump sum payout that remains the same regardless of when the insured’s death occurs during the policy duration. For example, if someone purchases a 20-year level term assurance policy with a coverage amount of £500,000, the beneficiaries will receive £500,000 in the event of the insured’s death, whether it happens in year 1 or year 20.

Level term assurance is commonly used to cover specific financial obligations that remain constant over time, such as paying off an interest only mortgage, providing for children’s education, or ensuring income replacement for dependents.

2. Decreasing Term Assurance: Decreasing term assurance, on the other hand, provides coverage that decreases over the duration of the policy term. The coverage amount gradually reduces over time at a predetermined rate until it reaches zero by the end of the policy term. However, the premiums usually remain constant throughout the policy duration. Decreasing term assurance is often utilized to cover liabilities that gradually decrease over time, such as outstanding mortgage balances. As the insured pays off their mortgage or other debts, the amount they would need to cover decreases. By using decreasing term assurance, individuals can ensure that their coverage aligns with their decreasing financial responsibilities.

For instance, if someone takes out a 25-year decreasing term assurance policy to cover their mortgage, the coverage amount will decrease annually, mirroring the reduction in the mortgage balance over the years. By the end of the 25-year term, the coverage will be zero, as the mortgage will be paid off.

The main difference between level term assurance and decreasing term assurance lies in the nature of the coverage amount. Level term assurance offers a fixed coverage amount throughout the policy term, while decreasing term assurance provides a gradually decreasing coverage amount over time. The choice between the two types depends on the individual’s specific financial needs and objective