As well as protecting the house and the cars, protecting the family should be high on the agenda when considering risks
Such protection can be arranged by setting up suitable insurance or assurance policies.
What is insurance?
Insurance is concerned with protection against risk (an event that may or may not happen). Insurance policies can be obtained to cover virtually any contingency. General policies cover more common events (eg fire, theft or natural disasters like weather conditions). More specific contingencies need underwriting by specialist insurers. As insurance covers risk, policies are written for a period of time or for an amount of cover. The period may extend for one day or several years, but is usually renewed annually.
What is assurance?
Assurance is a protection against certainties (that is, an event that will happen, such as death). Assurance policies are written to cover a specified sum of money which is assured to be paid out on the death of the individual. However, as this may only be required when working or whilst children are at home, the individual can select how long the policy runs. These policies are called “term assurances”. Others can be arranged to run until the individual actually dies. These are called “whole of life” policies.
How can an individual be protected?
For an individual, the whole family is at risk if the main earner, or indeed the individual who stays at home, suffers long-term illness or is incapacitated in some way, through accident or ill health.
Personal accident insurance provides a lump sum depending on the severity of the injury and may also cover initial medical costs.
Absence from work through sickness can be a major problem for an individual or a family. Private medical insurance policies provide cover to meet medical expenses for private treatment which avoid the potential long delays under the National Health Service. Convalescence may also be covered enabling the individual to return to full-time work much sooner.
Long term illness
Permanent health insurance (PHI) policies pay benefits during a period of long-term incapacity (through illness or accident) if this prevents the breadwinner from working and in some cases stops the spouse at home from looking after the house and family. Any benefits paid are normally tax-free but no tax relief is allowed on the premiums. When a policy is taken out, consideration should also be given to ‘waiver of premium’. This is a small amount paid in addition to the policy contribution to protect the policy if an individual cannot continue paying the premiums.
There is a limit to the benefits payable which is related to the normal earning capacity of the individual or the costs of providing help for a house wife/husband. State benefits may also be taken into account. The benefits are only paid to normal retirement age. As the benefits are treated as non-taxable the payments will not qualify for pension contributions.
This is also known as “dread disease” cover. Benefits are paid in the form of a single lump sum rather than a series of regular payments.
Benefits will be paid on the diagnosis of a critical illness or a medical condition such as a heart attack, cancer or a stroke. The advantage of this form of cover is that benefits are payable on diagnosis. This can help the individual when the funds are needed by him/her, rather than being paid, after death, to the estate, as with normal life assurance. The benefits are payable even if the individual subsequently recovers sufficiently to return to work. See more in the article A Guide to Critical Illness Cover
The question for an individual to ask is: “Can a dependant survive financially if I am no longer here?” If not, the type of cover required will need to take account of the following factors:
the amount of capital to be paid out will depend on the personal circumstances of the individual and what financial protection is needed for the family
term assurances only pay out the sum assured, whereas “whole of life” policies contain an investment element which can be surrendered in due course (eg when the protection is no longer needed)
policies can be decreasing, increasing and/or convertible in order to meet the varying assurance needs of an individual over a long period
family income benefit policies are decreasing term assurances. The lump sum payable on premature death can be taken in equal instalments over the remainder of the term of the policy as income replacement.
Can my children be insured?
Yes. But unless some form of tragedy occurs it is unlikely that they will die before their parents.
Most insurance companies offer a deferred life assurance policy where premiums can be paid at a very young age with life assurance cover kicking in at age 18. Prior to this age, the policy is treated as an endowment.
Are there any other issues to consider?
It should be ensured that all pension benefits are written in trust. This will enable them to be paid, in the event of death before retirement, to the person chosen by the policy owner and without any charge to inheritance tax (IHT).
Death in service benefits
Should death occur early, Death In Service (DIS) benefits can provide a valuable source of funds for the surviving spouse and immediate family. This is normally provided by the employer and can be up to four times an individual’s salary.
These benefits should also be written in trust to prevent any IHT charge and to ensure that they go to the individuals for whom they are intended.
It is important that everyone has a valid will. Wills (once drawn up, signed and witnessed) should be reviewed on a regular basis to ensure that their details are current and that the estate will still pass to the intended beneficiaries.
Various events, such as the birth of a new child, a death of an elder relative or some unexpected inheritance should also result in a will being reviewed. Other events, such as the marriage or divorce of the testator invalidate a will drawn up prior to the event and another one will therefore be required.
See more in the article about Wills & Estates.
Who should I contact?
If you would like advice on any of the points covered in this factsheet oryour Independent Financial Advisor, or if you do not have one, Find an IFA.