We're running for cover as the economic clouds gather. But will we be safe or sorry?
From income protection to mortgage payment cover, Esther Shaw looks at the benefits and pitfalls of policies that pledge to safeguard our finances
Sunday 18 May 2008
As the credit crunch continues to unfold, one of the biggest fears for many people is that they may not be able to pay their mortgage, or meet other financial commitments, if they lose their job or are unable to work due to illness or accident.
That such anxieties are on the increase amid the economic uncertainty is confirmed by insurance broker Lifesearch, which has recorded a marked rise recently in sales of policies designed to safeguard people's finances.
"We started 643 policies in one week and that followed straight after two previous record weeks," says Kevin Carr, head of protection strategy at Lifesearch.
He adds that sales of policies such as income replacement, unemployment and critical illness cover tend to boom when other markets suffer.
"When the FTSE falls, protection sales rise; the two are directly inverse," he explains. "The theory is twofold. First off, when times are tough, consumers go back to basics and protect what they have before spending or before saving or investing. We have definitely seen an increase in unemployment cover and income protection enquiries."
"There is also a theory," Mr Carr continues, "that when other markets are struggling, independent financial advisers and mortgage brokers look to sell protection products to supplement their income."
Ian Durrell from the insurance comparison site Onlyfinance.com says the fact that consumers are reviewing and updating their protection cover is a "reflection of uncertain times ahead". He adds: "The usual triggers for taking out protection products are marriage, children, loss of a family member or a mortgage. But as both the housing market and the economy have taken some sharp knocks in recent months, people are looking to protection products to make sure they'll be covered if things go wrong."
So if you do want to take out some kind of insurance to protect your finances, where should you begin?
The first product to consider is income protection – a policy that pays out a tax-free replacement for your earnings in the event of ill-health.
"Income protection enables you to pay the mortgage as well as all the daily costs of living – potentially until you retire," explains Mr Carr. And if you are just as worried about redun-dancy as being invalided out of work, he adds, "unemployment cover can be added to an income protection policy at extra cost".
When taking out income protection, consider buying a guaranteed-rate policy, as opposed to one with a reviewable rate, as this gives you the peace of mind that no matter what happens throughout the term of the policy, the price will remain the same – even if you make a claim and return to work.
Also note that while some policies will pay out if you can no longer do your own job, others will stipulate that you have to be unable to do any job. Potentially, that's a big difference.
For some people, the overriding concern at the moment is keeping their home, so a product whose appeal has been increasing is mortgage payment protection insurance (MPPI). If you can't work because of ill-health or redundancy, it will cover your commitments on the home loan.
However, these policies have been criticised by consumer groups for excluding too many people from payouts – those with certain medical conditions, for example – and only covering debt repayment rather than supplying policyholders with money to live off when they most need it.
Mr Carr thinks they are the poor relation of income protection. "Many people will opt for MPPI rather than income protection, but these plans can be inferior and may even cost you more – particularly if you are young and healthy," he says. "Typically, MPPI policies will only pay out for one year, have a number of exclusions, and the conditions of the policy can be changed at short notice."
You could also consider life assurance combined with critical illness cover, which pays out a lump sum if the policyholder is diagnosed with a serious illness. The two tend to be sold together.
While there are many different types of life cover, "term assurance" is the most common and pays out should you pass away within a specific time. The cover can be "level", "increasing" or even "decreasing" to suit a mortgage. It can also be paid as an income or a lump sum.
Critical illness policies cover certain core conditions such as heart attacks, kidney failure or cancer, but it's crucial that you check the wording of a policy to find out exactly what you are covered for.
And make sure you are honest when you apply for protection, to avoid getting turned down for compensation at a later stage.
Recently, the insurance industry pledged to improve its record on payouts – in other words, to try not to reject so many claims. Put simply, their "non-disclosure" commitment means they will no longer turn claims down flat if they find out the policyholder made a minor omission on their application. Even in those cases where the omission is quite major, the insurer can exercise its discretion to make part-payment of the sum assured. It's early days but it does seem non-disclosure has led to more claims being paid out in full or at least in part.
One product you need to be extremely wary of, however, is payment protection insurance (PPI). While this is designed to cover you if you fall ill, have an accident or lose your job and can't make repayments on your loan, credit card or mortgage, consumer groups warn that it can be over-priced or filled with exclusions, and that it is often mis-sold.
Last year, an Office of Fair Trading (OFT) probe exposed sales staff for telling borrowers the cover was compulsory – or including it in loan quotes – when in fact it is optional.
The OFT has since referred the sector to the Competition Commission.
"Taking PPI from a loan provider is very expensive," warns Michelle Slade from financial analyst Moneyfacts. "It can add thousands of pounds to your loan."
'It's all about peace of mind and looking after the family'
With a young family to consider against a backdrop of economic uncertainty, Sarah and Andrew McLeod decided they should take out an income protection policy.
Sarah, 30, works as a finance assistant, while Andrew, 37, is a self-employed sign maker. The couple live in Stockport and have a 10-year-old son, Adam.
"With all this talk of the credit crunch and the general volatility of the money markets, we thought it was important to review our protection provision," says Sarah.
"We have been with the Co-op Bank for several years, initially because of its ethical credentials, and have savings plans with it already. Earlier this year, we contacted our financial adviser at the bank to see what would be the best product for us."
The couple now pay £37.98 a month for an income protection policy with Co-operative Insurance. This would give them a weekly income of £833 until Andrew is 65 – should the worst happen.
"It's all about looking after the family," says Sarah. "We're pleased to have this peace of mind at a reasonable price."
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