Financial protection for you and your family

Financial protection for you and your family

Introduction Most of us believe life and other forms of protection insurance is a good thing. Protecting your family should underpin financial planning and it can also be a key business tool or estate planning mechanism. Insurance can be viewed as complicated, yet understand the fundamentals, and it becomes relatively straightforward. The problem is no-one bothers to explain how it works in the first place. Why life insurance? Life insurance provides money where there is a financial need resulting from a death, although there may be other reasons to buy cover. Paying off a mortgage (or other loan) if a borrower dies. Protecting a family against the early death of a spouse, partner or parent. Life insurance provides a lump sum or income to help compensate for the loss of someone s salary. Where there are young children, any need is likely to be greater but decline as they become more independent. Paying for a funeral. Paying inheritance tax (IHT). Protecting a business against the financial consequences of the loss of a business owner or key employee. You can have life insurance on the life of one person or on the joint lives of two. More is possible, but is unusual except for group life insurance, usually bought by employers. Who gets covered? If your income will be lost if you die, you are the life to be insured. If you live with a spouse or partner, you can insure both lives. In that case, the policy will pay out if one of you dies. If you are insuring to pay IHT, a second death policy is needed. This is a basic IHT tax planning technique that makes sure that the nil rate band of the first spouse to die is not wasted. The payout on life insurance might be a lump sum or a regular income. If it is a regular income, a decision needs to be made on how long income is payable for example, until children have finished education. You might want a lump sum to pay off mortgage loan if you die. Minimum cover will be the outstanding mortgage; perhaps with the sum insured falling year by year if you have a repayment mortgage. But most need more cover. Those with or planning a family, may want ten times salary cover or more. Once any loans have been paid and the remainder invested it would still generate less than your salary. For young children, a regular income perhaps until they leave education may be more appropriate.

Ensuring the right people get the money It makes sense to have a will. If you die intestate, the distribution of your estate determined by the state. In some circumstances it may be wise to take out a policy on someone else s life, e.g. taking out a policy on your spouse s or partner s life. Life insurance can be written in trust and we can help. This helps avoid probate delays and uncertainties about beneficiaries. It may also have IHT advantages. Protecting against other events There may be other events you wish to protect against too. Private medical insurance Private medical insurance (PMI) pays for private health treatment. Depending on budget, you choose what you want covered just in-patient or daypatient treatment, or out-patient consultations and tests too. PMI only pays for acute condition treatment those that come on suddenly and can be cured. It does not cover chronic conditions and pre-existing conditions may be excluded. Health cash plans Health cash plans pay for everyday health costs, typically 75%-100% of costs for dentistry, optical and consultation costs, plus a small sum for each day spent in hospital, subject to an annual limit. Other dental options include capitation and maintenance plans, which are agreed with your dentist and cover likely costs over the next year. Dental insurance is also available. Plans may be subject to an initial waiting period to stop people taking out cover for known treatment, then cancelling. Critical illness insurance Critical illness insurance pays a lump sum on diagnosis. Over 30 conditions may be covered, including serious cancers, heart attack and stroke. It is often taken out to cover a mortgage and, because you are more likely to have a critical illness than die, is more expensive than life insurance. Income protection Income protection sometimes called permanent health insurance pays a weekly or monthly income if you cannot work because of illness or disability. You can insure up to around half your income. It pays after a waiting period on each claim, and can pay up to retirement age. It covers more conditions than critical illness insurance, but only if the condition stops you working. If you are not in paid work, you can get income protection on a limited basis. Accident, sickness and unemployment insurance Accident, sickness and unemployment (ASU) insurance is known as PPI (payment protection insurance) if used to cover credit or a loan, or Mortgage payment protection insurance (MPPI) to cover your mortgage. It pays monthly income for up to one or two years only if you cannot work because of illness, disability or unemployment. Some policies pay off any loan if you die. Policies usually last for the term of the loan or up to retirement age. Cover from lenders can be substantially more expensive. Long-term care By age 80, there is about a 1 in 5 chance of needing long-term care, which may cost 25,000 a year or more situations vary and planning can be complex. You could qualify for some state/local authority help, but this is means-tested. It is possible to buy insurance in advance of needing care. Alternatively, you can wait and see if care becomes needed. It may be possible to rearrange investments or take out an arrangement linked your home s value a lifetime mortgage or home reversion scheme.

The right life insurance policies for you When it comes to life insurance, there are three main types: 1 pays Term insurance if you die only during the term of the policy Whole of life insurance 2pays whenever you die Level term Pays a fixed sum if you die during the term of the policy. Policies may be renewable (can be extended at the end of the term) or convertible (to a whole of life or endowment policy), or both. Decreasing term As level term, but the sum insured falls each year. Mortgage protection As decreasing term, but the fall is in line with the outstanding capital on a repayment (or capital and interest) mortgage. The higher your mortgage interest rate, the slower the outstanding mortgage capital falls each year. When choosing this, make sure the interest rate matches your mortgage (and will go on doing so if the rate rises in future), or that the rate is higher than the interest rate you expect at any time during your mortgage. Family income benefit Pays an annual sum if you die during the term of the policy and until the end of the term. If you died in year one of a 20-year policy, the annual sum would be paid 20 times; if you died in the last year, it would only be paid once. This can provide the highest initial cover for the lowest cost. Whole of life insurance Premiums are usually more expensive than for term insurance because of payment certainty. To help keep costs low, insurers often offer: Reviewable premiums may be fixed for 5 or 10 years only. Extra cover Premiums are artificially low initially but rise later. The increase, usually after 5 or 10 years, can be significant. Maxi cover policy offers the highest sum insured for the lowest initial premium but the biggest rise later (perhaps suitable if income is low but will rise swiftly in future). No surrender values Because whole life policies pay out eventually, if you stop a policy early, the insurer may pay a surrender vale (or cash value) or convert the policy to paid up (the sum insured continues but is lower and you stop paying premiums completely). To offer lower premiums, some insurers no longer include surrender values. Stopping premiums ends the policy. Low start premiums start off artificially low, then increase, usually every year.

Endowment insurance 3pays if you die during the term of the policy or at the end Insurers may also offer: With profits insurers declare a bonus dividend every year, added to the sum insured. Policies are more expensive, but in effect the sum insured rises each year (though not guaranteed and depends on how well the insurer performs). Unit linking Similar to with-profits, but premiums are invested into insurance funds, which go up and down in line with investments held. Premiums limited to a particular age For example, 85 or 100. After cover continues but no more premiums are paid. Endowments Traditionally, endowments were used to build a cash sum at the end of the policy term, often to pay off a mortgage. They also pay out on death during the term. Endowments are primarily savings plans, but include life insurance. They are now rarely used to fund mortgages. Add-ons Insurers may also offer life insurance linked in with other types of protection, such as term insurance that includes critical illness insurance or income protection. Waiver of premium If you are unable to work because of illness or disability, the insurer pays the premiums. There is an initial waiting or deferred period of three to six months after such an event occurs, and an extra premium is charged. Many insurers will offer free trust wordings to enable you to leave the policy to beneficiaries on your death. We can advise you on this.

How we can help Insurers are constantly looking at new ways to meet people s needs, such as through life insurance that includes critical illness and/or income protection insurance, which may be cheaper. It is important to look at your options what do you need most now? How much cover do you need? Can you defer some cover until a future date? We can help you to select the right policy in the most economical way. Our role is to do three things: 1. To know enough about you to make the right recommendations. We do a factfind taking account of facts, your preferences and views. We don t expect you to be an expert on life insurance, but we need to know your attitude to risk. Whether for example, you accept premiums may rise or want a guaranteed solution. 2. To help you to identify priorities. If you were insured against absolutely everything, like most people you may find premiums unaffordable. Working out how things might change in future and prioritising matters could be a sensible thing to do. 3. Recommend solutions to meet your needs. The right policy is important, but a will or writing policies in trust could be too.

Useful terms Assurance or insurance? Insurance covers things that might happen (e.g. dying in the next 20 years), whereas assurance covers something that will happen (such as dying eventually). We use the term insurance to cover both. Reviewable or guaranteed rates Guaranteed premium rates are fixed for the whole term. Reviewable rates (which are cheaper) can be changed by the insurer, based on factors such as life expectancy, investment returns and expenses. Reviewable rates may remain cheaper, but may go up in the future. If that happens, you may have the option of reducing the sum insured. Guaranteed insurability Gives the option to increase cover in future, up to a pre-set limit, without new underwriting. Typically, it allows you to increase cover by up to 50% on marriage, moving home, birth or adoption of a child, promotion at work or receiving a legacy although rules vary. Inter-vivos A decreasing term insurance that lasts for seven years and used in IHT planning. Term 100 An alternative to whole life insurance, running to age 100. Increasable, escalating or index- linked The sum insured rises each year (or every three or five years) by a fixed amount, or in line with an index. Common indices are the Retail Prices Index (RPI) or the Average Weekly Earnings (AWE). AWE usually rises faster than RPI, although this has not been the case recently. Increasable policies can help offset the effects of inflation. Where cover rises, the premium will usually rise, because you will then be older.

AWD Chase de Vere AWD Chase de Vere is a national firm of Independent Financial Advisers with offices around the UK. We work with clients in all parts of the UK advising them on investment, pension, protection and tax planning issues. Tax advice is not regulated by the Financial Services Authority. To find out more about how we may be able to help you, please call 0845 140 4014* or email enquiries@awdcdv.com. * 9 am 5 pm, Monday to Friday. We also work alongside a number of blue chip companies, member associations and local authorities to provide redundancy planning and advice to their affected employees and members. AWD Chase de Vere Limited (registered in England Number 2090838) is a wholly owned subsidiary of AWD Group plc and is authorised and regulated by the Financial Services Authority. AWD Group plc is a member of AWD Holding AG, one of Europe s largest financial advice groups. Registered office: 60 New Broad Street, London, EC2M 1JJ. VAT Registration Number 503 3745 71.