By Adam Ellis, Senior Adviser of Sovereign Wealth LLP
We live in economically-challenged times. The threat of a double-dip recession, rising unemployment, and a second global banking crisis have left many people with less money in their pocket to spend.
Most parents will have some level of life cover in place, typically enough to pay off their mortgage should the unthinkable happen, but protecting your family is more than buying a simple life insurance policy.
The harsh and sad fact is that we are very likely to be close to someone who gets a serious illness. Take cancer, for instance. According to Macmillan, the cancer charity, one in every three of us will be diagnosed with cancer and one-third will be below the age of 65 (Source: www.macmillan.org.uk, August 2011).
What’s more, every year 146,000 people suffer a heart attack, of which some 52,000 of those people will survive (Source: www.cardiacmatters.co.uk, January 2011).
Taking out a critical illness policy can offer some financial reassurance. These policies promise to pay out a lump sum not when you die but on diagnosis of a specified terminal or other debilitating condition, which typically includes cancer, a stroke, heart attack, kidney failure or multiple sclerosis.
Critical illness cover is not as simple a financial product as, say, household insurance. It's complicated and often difficult to get to grips with. Application forms can be complex and full of medical jargon, and often ask questions that leave the average consumer vulnerable to an oversight that could invalidate a claim. Consumers often fail to understand what they are covered for and, more importantly, what is not covered, so it pays to get expert help before signing on the dotted line.
Policies can also be expensive, although a number of providers have moved to offer flexible critical illness policies that cover a limited number of conditions and are priced lower accordingly.
If you can afford to do so, it might also be worth reviewing your life cover too. Buying extra life insurance, beyond the amount that covers the mortgage, could provide a legacy for your heirs to fall back on. The more immediate concern for many families will be the possibility of losing a job. Recent statistics show that almost 1,400 people are made redundant every day (Source: www.creditaction.org.uk, April 2011). It is possible to buy insurance that will pay a proportion of your salary for a fixed period of time, should this happen.
Again, buying such cover is less than straightforward. You can choose between a simple payment protection plan or a more comprehensive income protection policy. With both, the unemployment cover is fairly similar: people can insure up to 50 per cent of their gross income, and can usually only claim for a year if they are made redundant.
The sickness benefits available on each vary substantially. Remember that if you are off work because of sickness you will only get £81.60 a week from the State, for a maximum of 28 weeks. With an income protection policy you can claim for as long as you are unable to work or until retirement. With a payment protection plan, payments are made for 12 months.
There are also standalone mortgage protection policies to consider, which will help cover your mortgage repayments while you are ill.
It is not just younger people that need to consider all eventualities. By the time your fiftieth birthday has been and gone, there is every chance that your children will have flown the nest and that your mortgage is, all but, paid off.
But that doesn’t mean you should stop thinking about insurance and protecting your family, wealth and health.
You will have seen whole-life insurance for older people advertised on day-time television or have received mail shots through your letterbox from an insurer selling over-50s plans to cover funeral costs. Whole of life insurance policies do more that simply cover funeral costs – they can also help against a potential inheritance tax (IHT) bill.
Inheritance tax is currently paid on an estate worth more than £325,000 or £650,000 if you are married or have a civil partner and where the full allowance is passed to the surviving spouse. A common way to prepare for IHT is to take out a whole-of-life assurance policy in trust, which provides a sum that can be used to pay the IHT bill after you die. The proceeds of the policy do not form part of your estate, provided it is in a trust. So if your estate is expected to be liable for an IHT bill of, say £30,000, you can take out a policy for that sum to cover it.
Many people think of financial planning as creating wealth. It is, but it is also about protecting what you already have. These are nervous times, which are riddled with uncertainties. With a little bit of thinking - and some expert guidance - you can add some certainty to your financial future.
To receive a complimentary guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning, contact Adam Ellis, Senior Adviser of Sovereign Wealth LLP on 07739 965295, by email adam.ellis@sjpp.co.uk or visit www.sjpp.co.uk/sovereign.
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