Insurance protection is an often-overlooked aspect of good wealth management. While we’re able to control our proactive wealth growth through saving, tax planning and other wealth tools, personal protection cover looks after what we can’t control. It is a critical aspect of an overall portfolio and should be a key consideration for anyone looking to ensure their loved ones are taken care of should the worst happen.
What do we mean when we talk about “protection?”
Insurance protection comes in a few different formats. This isn’t travel, home or car insurance which are all typical everyday insurance policies we buy through comparison sites. These kinds of policies underwrite you, your earnings and your future longevity.
What kinds of policies are there?
Life Insurance
Life insurance is perhaps the best-known protection policy but can vary in a few ways. Life insurance pays out a lump sum to a nominated person or persons should you die unexpectedly. The lump sum can vary depending on the policy you obtain, but it is common for cheaper policies to only cover outstanding major debts such as a mortgage.
You can opt for the level of pay-out you want; however, this will be reflected in the monthly payments you have to make. It is also possible to opt for a policy that pays regular payments rather than a lump sum. The proceeds of a life insurance pay-out are tax-free, but if your partner were to receive a large cash lump sum, inheritance tax could be a future consideration for them.
Income protection
Income protection is designed to pay out if you fall ill or suffer an injury which leaves you unable to work. Income protection typically pays out regular payments that, assuming you have the correct level of cover, should take care of your essential living costs should you be unable to work. This is particularly important if you don’t have savings to fall back on or have regular payments such as a mortgage that you would not be able to pay, were you to be unable to work due to ill health.
Income protection can pay out continuously until retirement if you become unable to work over the long term. Payments are tax free and multiple claims can often be made.
Critical illness
Critical illness insurance is a policy designed to pay if you fall sick with a major illness such as cancer, stroke or heart attack, or if you suffer a life-changing injury that prevents you from being able to work. However, the key difference with income protection is that critical illness cover only covers a list of illnesses specified in the policy, typically the most common kinds of serious illnesses.
The benefit of critical illness insurance is that it is generally cheaper than income protection, which is a broader policy. You will receive a tax-free lump sum pay out should you fall ill with one of the covered conditions, and partial pay outs can generally be claimed if you fall ill with a less serious condition. Some plans cover children in your policy too.
How much cover do I need?
The level of cover you need should be whatever you feel comfortable would take care of your needs, while meeting an acceptable monthly premium cost. As a rule of thumb, start with any major payments such as the mortgage and calculate from there how much you think you would need were you unable to work, or how much your partner or children might need to ensure they can continue to live in the family home.
Life insurance is really important if you have dependents, be they a partner or children. However, if your partner could cover the mortgage without your income and you don’t have dependent children, it might not be a necessary policy. It is also important to check with your workplace whether you have some kind of death in service benefit in place. This can sometimes negate the need for, or reduce the cover required for your policy.
What affects protection costs?
The costs of protection come down to your personal circumstances. In the first instance, the level of cover you require, and the longevity of that cover, will determine the cost of the policy premiums. Beyond that, a series of other factors matter too. Insurers will assess you based on your age, weight, pre-existing health conditions and your family medical history. They will also take into account other lifestyle factors such as whether you engage in extreme or dangerous sports, whether you work in a dangerous job or if you smoke. All of these can increase your ultimate premium levels.
An insurer will consider your marital status, how many dependents you have, your living costs and debts before suggesting any policy level. This can be very tricky to assess. If you would like to talk about your cover options or anything else related to your long-term wealth journey, don’t hesitate to get in touch.