A Comprehensive Guide to Everything You Need to Know About Life Insurance and Protection Cover
Life Insurance is always one of those things you hear about. It is advertised on the television. Your friends have policies. Your parents have policies. Perhaps even you have been a beneficiary of someone’s life insurance policy. The key is that you have not taken a policy yourself.
Well, that could be for any number of reasons (excuses) such as; I can’t afford it, or I don’t want the added expenditure each month. Most simply and the most common reason I come across is people are confident they won’t be dying anytime soon. Instead of asking the obvious question “How do you know that?” I tend to tell a story.
People like stories. And this is an age-old story for financial advisors.
The mindset of an individual looking to take out life insurance to protect their loved ones.
Lets tell a short story. So, suppose in your back garden you had a cash machine. It sat in the middle of the garden and you could access it at any time. What is more, this cash machine doesn’t require a bank account or a pin or any of the usual things a cash machine needs. It simply dispenses cash every time you use it up to its maximum daily limit.
In effect you have in your back garden the proverbial money tree. Whenever you need money you can dial into the machine and lo and behold it appears. As if by magic.
Now, the likelihood is that you would grow to rely on that cash machine to dispense money as it has done for years. It becomes crucial to your financial stability. Every day you would make your way to the machine and cash out as much as the machine can give in a day.
The important question then becomes “Would you insure that machine against breaking down?”
This is the point that everyone says, “Well yes, of course I would!”
And it’s at that point that I turn around and say, “Well why aren’t you then?”
It is this though process and realisation that make people apply for life insurance cover.
Because the person who brings money into the house, keeps it going financially is that cash machine. They contribute a fixed amount of money each and every day to the house’s finances. If they break, or in the case of protection, become ill or pass away, then there is the same financial void as if the cash machine in the back garden had broken.
So, we have ascertained you contribute to the household and that replacing you financially in the event of an emergency is going to prove difficult; let’s look at the cover available.
Life Insurance (Sometimes referred to as Level Term Assurance)
This is the Ronseal equivalent of the protection world; it does what it says on the tin. With life insurance, if you pass away during the term you set on the policy then the policy pays out. Now, to cover off financial loss many people will take a policy until their retirement age. Being that retirement ages have increased and look set to increase again, it is probably best to err on the side of caution and insure for as long as possible.
Different life insurance providers have different maximum terms/ages, so it is crucial that you speak to an advisor when seeking out a policy. You can see why in our “Why use an advisor” section further down.
The other factor with life cover is to calculate the cost to the household if you were to pass away.
- Are there any debts that would need settling?
- How much do you contribute to the house annually?
- Are there childcare costs involved?
These are all things to consider. Again, a financial advisor will go through these with you and you will be provided with a figure that you should insure for. You will probably be surprised how much you’re actually worth to your household.
Now, you have the insurer to pick. And there are quite a few, some great and some not so good. Providing that the maximum term and sum assured aren’t coming into play and you have a selection across the whole of market then it is best to take the policy with the highest current claims pay-out percentage. Bear in mind they might not always be the cheapest.
In the worst-case scenario of a claim, you will want to know that the company is going to pay out on the policy. Cheapest doesn’t win in life insurance. If a life insurer has less than 90% life claims paid out, then avoid them. Most life insurers hover around the 95% claims paid out. Incidentally the remaining 5% are likely for non-disclosure which we will get to shortly.
So that’s life cover. In a nutshell. A policy that will pay out if you die within the time you have put on the policy.
Mortgage Protection (Sometimes called Decreasing Term Assurance)
You have a mortgage? That’s a significant debt. And in the event you pass away, then that debt needs to be repaid. If you have a joint mortgage, then the surviving partner can take on the debt. But can they afford it? Ask yourself if you both needed to be on the mortgage to get it in the first place. If the answer is yes, then you need to protect it.
A mortgage protection policy is designed to cover a repayment mortgage (for buy to let or interest only mortgages use a level term policy). Each month as you make a payment on the mortgage the cover amount will drop until by the end of the mortgage and on final payment there is no cover remaining.
The policy will be set up with your mortgage debt as the sum assured and the mortgage term as the term on the policy. Because the cover drops over time it is less risk to an insurer and the monthly premium will be cheaper when compared to a level term assurance policy.
Remember every time you re-mortgage that your policy might need to be updated so speak to your advisor with each re-mortgage.
Life Insurance Policy Options
- Indexation. This is a great feature with certain insurers. The value of the £20 in your wallet isn’t going to be the same in 25 years-time as it is today. Index linking essentially matches your cover amount with the rate of inflation.
Why is it great with certain insurers and not others? Well, it depends on what they are linking the rate to. Some insurers use the retail price index. Some have flat percentages, up to 5% in one case. This means that sometimes your cover will grow more than the rate of inflation. And, your premium grows as well. Some insurers will put on a higher monthly premium than the actual rate that they have increased your cover by. It is best to find an insurer that increases premium and cover on a like for like basis if this option is one you want.
It is a smart option to take, but be careful that you are getting good value for money when you are taking it.
- Convertibility. This is a bit of an oddball option. But it can make a lot of sense. Basically, when you take a term policy you know at some point in the future it will end. If you outlive the policy term some people feel as though they have paid a lot into a policy that has given them nothing (forgetting that they were actually insuring themselves in much the same way as insuring a car). Convertibility enables them to convert their term policy to a whole of life policy at the end of the term.
Why is this an oddball one? Well from the perspective that the term policy was taken to cover financial loss and that the term was set to run until a point when that is no longer an issue, it seems odd to recommend someone extend a policy more than is actually required.
But, that being said, there are those of us that want to get something back no matter what. And this option guarantees that providing they continue the monthly premium.
- Waiver of Premium. So, we all know that in the last 10 years there has been at least one time when we have thought money is a little tighter than usual. We all know that over a prolonged period of time something could go wrong that prevents us making our monthly life insurance payment. Waiver of premium is a buffer to protect that. In the event you’re disabled and unable to work this option allows you to “waive” (skip paying) the premium for up to 6 months.
6 months doesn’t sound like a long time. But I have had experience myself where that 6-month buffer has helped my clients through a rough patch and keep a policy they have needed in the future. In that respect, it is a valuable addition.
- Guaranteed Insurability. Need additional cover in the future? Then this option is vital. It allows you to extend your sum assured without any additional medical requirements. So, if you took a policy when you were young and healthy, and have since had a heart attack last year, that heart attack would not be included on the new premium.
But how do you know what the future holds? The key is we don’t but we as humans do make plans. We plan to start families or get married. With extra children it is very likely your cover might need to change. Make sure you get this option if you have changes planned on the horizon.
Of course, all of these features and benefits are likely to have some cost involved so always discuss with your advisor and weigh up the cost to benefit ratio. Also, adding all the features might seem like a good idea, but some may not be applicable to you. Think about each feature and how it could or would factor in your personal circumstances.
Whole of Life
These are the plans that traditionally people associate with life insurance. A policy that pays out the sum assured no matter how old you are or when the policy was taken. As long as you maintain your monthly premium it will pay out the sum assured when you die.
Pros – As long as you continue to pay your premium you are always guaranteed a pay-out when you die. Typically, you shouldn’t pay in more than you get back from the policy over time unless you live beyond what is considered a normal lifespan.
Cons – The policy premiums can be costly. Significantly more in most cases than a level term assurance policy because an insurer is guaranteeing to pay the sum assured when you die. If they are not put in trust, they can cause problems with taxation. Insurers are quick to cancel these policies if payments are missed. If in old age you simply forget to make payment it won’t have been worth it at all.
Putting these policies in trust is vital. We will explain Trusts in the next section. Whole of Life policies can make a world of difference to your next of kin and these policies aren’t to be shunned. They are however, only really applicable to certain individuals and simply having one for profit is not likely to be as lucrative as you might think.
Putting your life insurance policy in trust is the single most important thing to do when taking a life insurance policy. It has numerous benefits and is absolutely free with every insurer that I am aware of. It is a bit complicated sometimes to complete the forms, so it is great to seek the advice of your advisor again when making sure it is completed correctly.
A trust means that you nominate the person or people that receive the money in the event of you passing away. It means that you specifically choose who gets the money and it also crucially bypasses your estate. This means the money is a tax free lump sum (no inheritance tax for high sums assured) and it isn’t tied up for a lengthy time while probate completes. The last is particularly useful if you have a whole of life policy to pay funeral expenses. With a valid death certificate, I have seen insurers pay claims in a matter of days. Having the policy in trust is something that should always be done.
When you take out your policy any decent advisor should mention placing the policy in trust. They should not levee any charge for this because as I mentioned the insurers do this completely free of charge. Then you will receive a trust pack from the relevant insurer. Complete the forms, nominate who gets the money, have the forms signed and witnessed and then post them back to the insurer.
It can seem like a daunting form but once you get your head around the legal jargon it’s as easy as ABC.
Okay, so we have the basics of life cover out of the way. It is important now to talk about barriers to entry or elements that may prove difficult when trying to obtain life cover.
Medical disclosures are made when taking out a life insurance policy. And it is absolutely imperative that you do this right.
When you take a policy, there will be a series of yes/no questions known as the medical declaration.
Why is it so important to get right? Because claims will be declined for the smallest of mistakes.
Follow this step by step guide to make sure your cover actually covers you.
- Listen carefully to the questions. If the question asks, “have you seen a GP in the last 12 months?” Take the time and remember. Even if it was for an ear infection or something you deem trivial make sure you answer yes and declare it. Declaring trivial things will likely not increase your premium but they will mean the insurer has to pay out.
- This one catches people out all the time. Have you given up? How long ago? Is it noted on your medical records? To be a non-smoker on a life insurance policy you will need to have been a non-smoker for 12 months and it must be on your medical records. Simply declaring you’re a non-smoker doesn’t work. Insurers can request cotinine tests. If you refuse to provide a sample they are within their rights to either cancel the policy or levee smoker rates onto your premium.
- Tell the truth. Never try to play down a medical condition. If you had major heart surgery but only declare a minor heart condition they will find out at point of claim. This could invalidate your claim and result in a lot of wasted money on your part.
- Drug/Alcohol problems. If you have misused or had issues with either drugs and alcohol, then make sure you notify the insurer. Again, if this is noted deep in your medical records and you fail to disclose because it was something a long time ago, it could still invalidate your claim.
- Mental Health conditions play an important part in a medical declaration. If you have a diagnosed mental health condition, make sure you disclose it. Premiums can vary drastically with mental health disclosures. Remember an insurer isn’t just basing the premium on your circumstances, they are using medical/NHS statistics to do a risk assessment. So unfortunately, some mental health conditions can cause quite sharp premium increases.
What if my medical condition means the insurer declines to cover me?
Don’t despair. There are plenty of insurers on the market, each with their own attitude to risk. So, just because one insurer declines you doesn’t mean another won’t. Typically, serious medical disclosures will take a bit of work to find the right insurer but with the right advisor it can be easier. There are even specialist insurers for medical conditions that use Lloyds of London syndicates to place insurance. These premiums tend to be hefty but if you need the cover then it is a no brainer.
If you are over the age of 50 and need a smaller amount of cover having been declined for insurance, then the over 50’s market is the one for you. See our Over 50’s section below.
Sometimes a newly diagnosed condition will mean you’re declined cover. But after a period where the insurer is able to monitor how it is controlled they might be able to cover. A common condition that insurers love to see how it is being controlled is diabetes.
Over 50’s Life Insurance
Because you’re over 50 does NOT mean you should get an over 50’s life insurance policy. Don’t listen to the adverts and the free gifts. These policies are good for people who have had serious medical conditions, looking for a small sum assured and have been declined on cover elsewhere and are over the age of 50. Unless you fall into that strict criteria it is best to look at conventional life insurance policies.
Over 50’s policies have a deferred period before the cover kicks in. This varies from insurer to insurer and is normally between 12 months and 24 months. If you die in the deferred period most insurers will return your premiums to your next of kin. Some pay a benefit on top of the premiums. Be on the look-out for what happens if you die in the deferred period.
These policies are front loaded, and age rated. This means the older you are, the more costly the insurance will be. It also means the older you are the less likely you are to be eligible for higher cover amounts. Not that the sums assured are spectacular. More often than not, they are around the £5,000 to £10,000 mark. That being said, they are great for covering funeral expenses and don’t have the pitfalls of funeral plans.
It is always important to put these policies in trust. Remember the golden rule, if you want an over 50’s policy, make sure you have looked at standard policies first. Standard policies are cheaper. Over 50’s policies also come with a pitfall that if you live a long time with one you could find yourself paying in more than you get back (hence the glitzy adverts and the free gifts to get you on board).
Critical Illness Cover
Critical illness cover is an add-on to term assurance policies and, in some rare cases, whole of life policies. It means that should you be diagnosed during the policy term with a condition from the insurers list, then you will be given a pay out on the policy.
Typically, the most claimed on diagnoses are Cancer, Stroke, Heart Attack and Multiple Sclerosis.
Insurers lists vary; some cover a lot of medical conditions while others don’t cover very many at all. It is very important that this type of cover is discussed with an advisor as even taking the policy with the insurer who covers the most conditions could be your biggest mistake. Some insurers cover lots of conditions but the definitions of what makes it claimable is stringent. Other insurers may have less conditions but looser definitions meaning they are far easier to claim on.
As with life cover, a good indicator to look at is how an insurer pays its claims. So, looking for insurers that are paying high percentages of claims is preferable. If an insurer doesn’t publish their claims statistics they either are new to the market in that area or they have buried them because they are not going to win any customers by broadcasting them. The rule of thumb being a quick Google search should bring up the latest years claims statistics for any given insurer. If it doesn’t or takes a lot longer to find, then they might be an insurer to steer clear of.
Serious Illness Cover
Serious Illness Cover is Vitality Life’s version of Critical Illness Cover. It covers significantly more medical conditions than any other insurer but pays out on a severity based system. It is great in the sense that it covers a lot of conditions so in theory you have broader scope to claim. The downside is that some of the conditions are so rare you would be hard pressed to find them on an episode of House MD. Even if you were diagnosed with them, the likelihood of a full pay out is slim to none.
Discuss the Vitality offering as a whole with your advisor and then decide if they are right for you. They are not right for everyone, unlike most critical illness policies, so make sure you understand what Vitality does and how it is applicable to your lifestyle.
Terminal Illness Cover
Terminal illness cover often gets confused with the above two mentioned covers. It shouldn’t be. Terminal illness cover is built into most, if not all, life policies that I have encountered. It means that in the event you are diagnosed with a terminal illness and have less than 12 months to live, the policy will pay out early. Some insurers limit this cover and exclude the last 12 months of the policy. Some though are really good and include full terminal illness cover throughout the term of the policy.
Of all the covers we will discuss today, this is the single most claimed on cover. It tends also to be the most costly on a monthly basis. Essentially, if you are signed off work or unable to complete your job role then the insurer will pay you your monthly wage. Well, almost. They tend to pay up to 50% which means that you would receive the same amount if you were a higher rate tax payer because the sum assured is tax free.
With that in mind, Income Protection policies are really designed for higher rate tax payers. And if you’re lucky enough to fall into that bracket then you should definitely consider this type of policy to protect your income should you be signed off sick from work.
These policies can work well in other situations of course and they are not exclusive to higher tax rate payers (they were just designed for them) so discuss this as an option with your advisor.
Some insurers create bundles with discounts for having more than one type of policy, some create bespoke policies to incorporate an element of each cover such as “real life” cover.
There are certain things you need to be aware of with income protection, so make sure you take on board what your advisor says. Some policies have deferred periods that might not be suitable for you, some only pay out for 12 months which again may not be ideal. Which leads us onto our next point…
Why do I need an advisor?
Well the answer is quite straightforward, you don’t. Technically you could use this guide and purchase your own insurance. You would know the trappings of certain policies and you should be able to use the information above to ask the right questions. But the truth is that doing it alone no matter how well equipped you may feel is often going to leave you with a policy that could be beaten by an advisor.
That is their job after all: to get their clients the BEST policy for their circumstances. So, approaching an advisor will help you in 5 ways.
- Look for whole of market advisors. They will scour the entire market after discussing your needs with you and find you the best policy from everyone available. Sole tied advisors or advisors with limited market coverage are not going to be best placed to get you the best policy so always make sure that you ask if they are whole of market. If the answer is no, be polite “thank you for your time” and move on to the next one.
- They shouldn’t charge you a penny. Advisors get paid commissions. The rates of which are similar across the entire insurance sector meaning that it really is a very level playing field. The commissions are built into your overall insurance cost so technically they are going to make money from you, but it is not upfront, and it really will impact very little on your monthly cost. For the sake of a few pennies each month having the advice and knowing your policy will pay out is a no brainer. If an advisor tries to charge an upfront fee for life insurance or protection advice then move on. The only exception to upfront fees is if the scope of advice goes beyond protection. If you are asking for pensions and mortgage advice as well then it is very common place to have a fee levied in these circumstances.
- Advisors should contact you every few years to review your policies. It is in their interest to do that as they get renewed commission payments. It is in your interest to review your policies as there might be something better available to you and if there isn’t, you have safe guarding from the ombudsman that an advisor can’t make a recommendation that is a detriment to you. The reviewing of policies is commonplace and extremely handy in many circumstances. It also keeps you advisor paid and happy.
- If there is anything complex about your situation then an advisor will be worth their weight in gold. Finding the one insurer out of the plethora available that will cover your previous cancer with no addition to the premium could save you a small fortune. Sometimes this adds to thousands and thousands of pounds over the term of any given policy.
- Having an advisor makes the trust process easier. As mentioned in the trust section it can be a daunting and sometimes confusing process. Your advisor is only a phone call away to assist and be on hand to talk you through completing the trust form.
Finding an advisor has never been simpler. Google will quickly tell you of local advisors and you can read reviews on websites like Yell to find the one that is most reputable.
Reviewable vs Guaranteed Premiums
One last part to our guide before we wrap things up and leave you to find your advisor to get covered.
Some insurers will offer initially discounted premiums. These tend to be to lure you in and sign up; year on year these premiums will increase, some by small amounts, some drastically. These are called reviewable premiums. Guaranteed premiums are often the preferred option as they allow you to know exactly how much is coming out each and every month for the entire policy. It means you can budget for your policy effectively.
Reviewable premiums, in rare circumstances, can be preferable. For example; you may currently be in medical or law school with a significant pay-rise on the horizon. Knowing your income is increasing may mean that you can start on a lower premium and comfortably budget in the increase.
Again, it is down to personal circumstance and should always be discussed thoroughly with your advisor. Be wary of any premiums that are age rated as certain milestone birthdays can see some truly eyewatering premium increases. If in doubt, stick safe and with a guaranteed monthly premium.
I hope you have found this guide practical and useful. It should serve as a good reference point when discussing things over the phone with your insurance broker. The key questions you need to ask have been included and also I have highlighted the common pitfalls so you don’t fall foul. Life insurance, as you can see, doesn’t actually have to be a morbid conversation and there are many aspects to it that are advantageous.
The key thing that overrides all other things is that sometimes you will be in a position where certain covers fall outside of your budget or what is affordable. It is at these points that you should let your advisor know so they can work with you to find an affordable package giving you as much of the cover you need as possible.
Be realistic though, the adverts that say from £3 a month are premiums for an 18-year-old, non-smoker, no medical conditions on a short term policy. If you’re 50 with a bit of blood pressure looking to insure until you are 90 years of age, be aware that the premium is going to be higher because the risk to the insurer is higher. Insurers get a bad reputation mainly due to other products. Life and Protection cover is probably the most squeaky-clean insurance on the UK market. They want to keep their claims pay out percentages high to attract continued custom. So, discard the preconceived idea of insurers avoiding paying out claims. Life cover simply isn’t like that. Be completely honest with them and they will be completely honest in the way they treat you and handle your claim in the event one is made.
I personally loath much of the insurance sector. My car insurance premium would make you think twice about driving for example. But, life protection insurers are there to provide peace of mind and they do it well, so be mindful they are genuinely going to help you if you need it.
A good tip is to look at an insurers DEFAQTO rating when comparing policies. Anything 3 star or above in protection is a solid insurer. Under 3 star tread a little more carefully. DEFAQTO works across all types of insurance so bookmark their page as well as this. It’s a great way of checking if your home insurer is up to standard.