We’re all familiar with insurance. The ones we must have like car and house insurance. The ones we choose to have to protect our pets, gadgets and holiday plans. But have you ever stopped to think about insuring yourself? How do you keep paying for all those other bits of insurance you’ve taken out if you lose your income?
Every year, the Association of British Insurers publishes key facts about the UK insurance industry.
According to their 2019 report there were more households with expenditure on pet insurance than on fixed term life insurance and income protection combined1. We are a nation of animal lovers yet that love doesn’t seem to extend to protecting ourselves!
How do I protect myself?
There have been many reports of famous insured body parts, Bruce Springstein’s voice, Dolly Parton’s 40DDs and America Ferrera’s smile to name a few2. For those of us not famous enough to warrant such insurance, the alternative is to insure our life and our income. Fortunately for most of us, this will also come with a much smaller price tag.
Why should I bother insuring myself?
Life on earth is unpredictable. We only have to look at the recent events to tell us this. Redundancies as high street shops close down due to changing consumer habits. Death and illness due to new diseases such as HIV/AIDS, Ebola and COVID-19. We’re sure everybody has been affected by the coronavirus pandemic in some way. These all pose a risk to your health and your income.
If you die, this can place a financial burden on your family who have not only lost a loved one but possibly also their main source of income. If you become too ill to go to work and your employer doesn’t offer you sick pay, how do you continue affording your mortgage and other bills? Statutory Sick Pay is currently £95.85 per week for up to 28 weeks3. Does the financial pressure make you go back to work too soon leading to further ill health? It can be a vicious cycle.
There are insurance products available that can help protect you and your family if these things happen. Insurance can never replace a loved one, or cure an illness but it can provide money at a time when the focus should not be on financial stress. Life insurance could allow family to pay off the mortgage and provide money towards looking after children. Income protection can provide an income if you’re too ill to work so you can continue paying your mortgage and bills while you focus on getting better.
How do I insure my life?
You can take out insurance that will pay out a lump sum if you die, or some policies can pay a regular income instead. There are three main types of life cover.
You take out cover for a defined period of time, and if you die during that period the policy will pay out a lump sum. This is usually the cheapest form of life insurance. Once the policy has paid out it ends. It is often referred to as a term assurance policy, although this should not be confused with the formal definition of assurance described next.
A life assurance policy is often better referred to as a whole-of-life policy as it guarantees to pay out a lump sum whenever you die. Many policies will allow you to stop paying the premiums when you reach a certain age, and the cover remains in place until you die when it will pay the lump sum. Once the policy has paid out it ends.
Family Income Benefit
This is similar to life insurance but instead of paying out a lump sum it will pay a regular amount from the time you die until the defined period of the policy ends. As this type of policy pays a regular amount, the policy stops paying and ends once the period you took it out for comes to end.
Insurance is all about estimating the risk something will happen and then putting a price on that risk. Your risk of dying will be affected by things like your age, lifestyle, occupation, health conditions and family history. The higher the perceived risk to the insurer, the higher the premium they will charge to provide you with cover.
What if I get seriously ill but don’t die?
You can take out insurance that will pay a lump sum if you are diagnosed with a serious or critical illness during the period of the policy. This is most commonly called critical illness cover. As the name suggests, this only covers illnesses that are severe or critical such as strokes, heart attacks and certain cancers. Some policies provide additional extra payments for less severe illnesses. The main policy will only pay out the lump sum once and then ends.
Being diagnosed with a critical illness can mean you’re not able to work for a long period of time. The lump sum can be used to pay off a mortgage or to replace your income whilst you can’t work.
How do I insure my income and my job?
You can take out insurance that will pay you a fixed monthly amount if you’re too ill to work, have an accident or are made redundant. There are two main types of policy that can provide a replacement income.
This will pay you a regular monthly amount equivalent to 50% to 70% of your normal gross income. You don’t pay income tax on income protection benefits. There are many options that can be chosen with an income protection policy such as how long it pays the benefit for, whether it starts paying the benefit immediately or after you’ve been ill for so long as well as how much benefit you actually get. These options can all be chosen when taking out a policy, and along with the same risk factors mentioned above for life insurance, will affect how much you will have to pay.
To make a claim you must be certified as medically unfit to work by a doctor. Once you have recovered and returned to work, the payments will stop but the policy continues. This means you can make multiple claims during the policy lifetime. How a claim is treated will depend on whether it is for the same illness as before or a new illness and how long it was since you last claimed.
You have to provide medical history to apply for income protection and this will be used to decide if cover can be provided as well as the premium that will be charged. You can choose to guarantee your premiums which means they won’t change during the period of your policy as long as you don’t change the actual cover.
Mortgage Payment Protection Insurance (MPPI) or Accident, Sickness, Unemployment (ASU) Cover
Payment Protection Insurance (PPI) has received a lot of coverage due to the mis-selling that occurred. People are therefore wary of this now. Both MPPI and ASU will pay a fixed monthly amount if you have a qualifying claim. Again, you need to be certified as medically unfit to work by a doctor. Both policies will usually pay you the benefit for 12 to 24 months then stop.
To qualify for MPPI you must have a mortgage and you can usually apply for cover equal to your monthly mortgage payment and a little more. With ASU cover the level of benefit is related to your income.
MPPI and ASU are classed as general insurance products, much like your car and home insurance. They are valid for one year and the insurer will offer a renewal premium each year. Although they don’t offer no claim discounts like car and home insurance, it is recommended to stay with the same provider as this avoids new exclusions and claim waiting periods.
Existing medical conditions do not prevent you obtaining MPPI or ASU. Depending on the insurer you will either be unable to make a claim on the policy for an existing medical condition ever, or for at least the first twelve months of having the policy. Some insurers only exclude claims for existing medical conditions during the first twelve months which is why it is beneficial to renew with the same provider.
How can I get some advice?
There is much more to the policies available than we’ve described above. We offer a full advice service which is free of charge and with no obligation. We encourage you to find out more about how to insure yourself and are happy to provide personalised advise and quotes based on your unique circumstances.
1 UK Insurance & Long-Term Savings Key Facts, December 2019, Association of British Insurers, https://www.abi.org.uk/globalassets/files/publications/public/key-facts/key_facts_2019_spread.pdf
2 Lloyd’s, https://www.lloyds.com/about-lloyds/history/innovation-and-unusual-risks/going-out-on-a-limb
3 Statutory Sick Pay (SSP), UK Government, https://www.gov.uk/statutory-sick-pay