As part of a financial plan, protecting your family is one of the highest priorities. You may have insurance in place, but does your policy really give you all the protection you need? While the premiums may be competitive, there could be some vital detail that requires additional planning, or means that another policy might be more suitable.
This guide is intended to provide a brief summary of the questions you should ask to determine if you have the right policy.
Or, if you are buying protection for the first time, it should serve as a handy reminder of the pitfalls to avoid.
General
Some issues are universal for all types of insurance. For example:
- What is the remaining term on the policy? If it’s intended to cover your requirements until you retire, it should run until a realistic retirement age. Similarly, if the policy is to clear a mortgage or pay for your children’s education, you should make sure the timescales line up.
- Have you declared all medical and lifestyle factors that could impact on a claim? If your insurance is already in place, you don’t need to declare new conditions, but you do need to make sure you were completely upfront when you applied. Even if the condition has nothing to do with the eventual claim, the insurer may declare the policy invalid and refuse to pay out.
Life Insurance
Life Insurance is designed to pay out a lump sum in the event of your death. The questions you should ask are:
- How much is the cover? This may seem obvious, but some plans decrease every year, as they are intended to cover a reducing liability like a mortgage. You also need to be sure that the cover amount is enough. For example, your life policy may clear your mortgage, but what about the loss of income and additional costs for your family?
- If the plan is in joint names, check if it would pay out on first or second death. Family protection is usually set up on a first death basis for the benefit of the surviving spouse. Whole of life plans are often set up on a second death basis to pay an Inheritance Tax bill.
- Is the policy in trust? If not, the money will be paid into your estate, be subject to probate procedures and possibly Inheritance Tax. A trust allows the proceeds to be paid out more quickly, and without IHT. You should also check who will benefit from your policy.
- Is your life insurance provided by your employer? First of all, check whether the benefits would be paid out to the company or to your family. If your life insurance would stop if you changed employer, you may want to obtain personal cover for additional peace of mind.
Critical Illness
A critical illness policy would pay out a lump sum if you were to be diagnosed with a serious illness. Consider:
- Which conditions are covered? This is very important, as not all insurers cover the same illnesses. The required level of severity can also vary between insurers.
- How old is your policy? A critical illness policy from the 1980s may cover more conditions, at a lower level of severity than a modern policy. With advances in healthcare, some illnesses are no longer as ‘critical’ as they once were.
- Are partial payments possible? Some critical illness plans will pay out a lower amount for less severe conditions. This increases the circumstances in which a claim could be made. But it also means that a number of small payouts over the course of your lifetime will reduce the eventual payout for a more serious illness.
- Is there life cover attached? Sometimes it can be good value to add critical illness cover to a life policy. But in most cases, the payment of a critical illness claim means that the life cover is then voided. Subject to budget, it is usually better to separate life and critical illness cover, particularly for joint policies.
Income Protection
An income protection plan is intended to replace your salary if you are unable to work due to illness or disability. Some points to think about:
- Is the policy a full-term plan? Ideally, the benefit should continue either until you recover or retire. Some plans would only pay out for five years or less.
- Can you increase your cover? If you are at the beginning of your career and promotions, marriage and children are in your planned future, you should look for a plan that allows you to increase your benefits without medical underwriting.
- Does your plan increase with inflation? Bear in mind that the cost of living has increased by 23% in the last 10 years. If your plan was set up some time ago, you should probably check the current value. Usually linking your benefits with inflation doesn’t cost any more at outset, but means that your premium will increase by a small amount each year.
- Does your plan include any exclusions or ratings? If you had a minor medical condition before applying for the policy, it is likely that this is excluded from any potential claim, or that your premium is higher than the standard. If you have long since recovered, you may be able to arrange a policy on standard terms.
- What is the deferred period? This may be from one month to one year. If you have a long deferral period, it is vital that you have an emergency fund to cover your expenses until you can claim.
- Is your occupation covered? Some policies will pay out if you cannot do your current job, although others may require you to seek alternative, less demanding work.
- Would you still be covered if you left the UK? It’s possible that your policy would be affected. For example, it’s common to limit the payment term to 12 months while you are resident outside the UK.
Buying insurance is simple, but ensuring you have the right cover can be a little more complicated.
