With the right cover, you can keep smiling even if that rainy day comes along

The pain of death, illness or injury can be eased with the right insurance, says Rob Griffin
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The Independent Online

Everyone wants the best for their loved ones – but thousands of families risk being plunged into poverty because they haven't taken out insurance to cover them financially should the main breadwinner die or fall ill.

There is no shortage of life insurance, income protection and critical illness policies, but very few people are buying them, says Swiss Re, which estimates the funding shortfall to be a staggering £2.3 trillion.

This is very short-sighted, warns Andrew Merricks, head of investments at Brighton-based financial adviser Skerritt Consultants, who insists that there are two main risks in life: either living too long and dying too soon.

"It's absolutely crucial to have some cover in place – particularly if you've got a young family," he says. "These days you need to build your own little welfare state because no one else is going to do it for you."

Now is also a good time to buy, suggests Matt Morris, policy adviser at broker LifeSearch, as fierce competition within the protection industry has led to some extremely competitive premiums.

"The cost of life cover has fallen – dropping about 40 per cent in five years. It has never been cheaper," Morris adds. "The critical illness industry paid out on 84 per cent of claims in 2006 – up from 81 per cent the previous year."

So, where do you start? Well, before going to see your financial adviser or searching for the best offers on the internet, it is important to know what you are talking about – and what type of policy might best suit your needs.

Life assurance

These policies provide financial security for your dependants should you die. If you don't have a spouse or children, therefore, then life assurance is probably is not worth considering.

There are two types of life cover – whole of life and term. Whereas whole of life pays out when you die, term policies operate on a fixed period basis – such as over a 25-year mortgage – and only pay out if you die within that period.

Critical illness cover

This will pay out a lump sum on the diagnosis of a specific critical illness, such as a stroke. There are no restrictions on how a payout can be used, so you can do anything from clearing the mortgage to paying for private healthcare with one. However, you must check the small print because some conditions – such as certain cancers – may not be covered. In addition, while some insurers exclude all pre-existing conditions, others make a decision based on factors such as the applicant's health.

Income protection insurance

These policies replace a person's income if they are unable to work for more than a specified period due to illness or accident. Usually, there is a waiting period before the payments kick in – the longer you agree to wait, the lower your premiums. However, once they start being paid they will continue until the claimant returns to work, dies or the contract expires – normally at retirement. Some policies come with extra benefits, such as retraining to help people get back to work.

IP pays out for conditions that are not covered under critical illness policies, such as stress.

Accident, sickness and unemployment insurance

Also known as mortgage payment protection and payment protection insurance, these products pay your mortgage repayments and loans if your income stops due to redundancy, accident or illness. Usually, they kick in one month after the money dries up and continues for a set period – often one or two years. The idea is to provide short-term assistance, but check for limitations and exclusions.

For example, you must have been continuously employed on a permanent contract by the same company for a year to qualify under the unemployment element.

Do you need it?

Before taking out any insurance, check what level of protection you already have. Have you any existing investment policies? Does your employer's pension fund afford you any cover?

Then you need to decide how much cover you require. The minimum required should be enough to pay off all outstanding debts, as well as providing a lump sum for each of your dependants. To give you an idea, work out how much you need to sustain your current standard of living over an average 12-month period and then multiply this by 25 years.

How to get the best deals

Many insurers will have a detailed guide to the illnesses and conditions covered, which will be written in clear, plain English. Ask to see this, as well as the document setting out the policy's key features, benefits and exclusions.

Most people buy critical illness cover when they take on a major financial commitment, such as a mortgage, but it's important not to buy the first policy offered. There's nothing to stop you shopping around; in fact it's advisable to do so.

It also pays to start young when premiums will be relatively cheap, rather than leaving it until later in life when the price of cover will start to rise substantially.

Another way to cut the cost of insurance is by quitting cigarettes – and what better time to choose than National No Smoking Day on Wednesday (12 March), adds Fiona Jackson, head of protection at Co-operative Insurance.

Ditching the weed can knock around a third off premiums for life, critical illness and income protection cover because medical evidence shows that smoking increases the risk of serious illnesses and exacerbates existing conditions.

"Giving up smoking can save people a significant amount of money as well as hopefully bringing a longer and better quality of life," she says.

Monitoring your decision

Don't think that just because you have bought a policy that you can then forget about it. It's advisable to revisit your original decision at regular periods to ensure that the cover bought is sufficient for your needs.

Have you changed jobs, for example, or do you intend to do so in the near future? Has there been a significant increase in your expenses that will need to be covered if you cannot work? Are you planning on having more children? All these questions need to be asked every year to keep yourself up to date.

Top tips

*Read the small print to ensure you know what the policy covers.

*Beware of accident and sickness policies that only pay for a limited period.

*Buy single rather than joint-life policies.

*Shop around and don't just talk to your bank or mortgage lender.

*Write any policy into trust.

Source: Lifesearch.co.uk

Stay healthy, pay less

Taxi driver Alan Johnson (left) has saved himself a fortune on insurance premiums since giving up smoking 18 months ago.

The 58-year-old, who lives in Manchester with his partner, Susan, had been puffing his way through 40 cigarettes a day for the past two decades.

Quitting the weed has improved not only his health but also his bank balance, because the amount he pays for life and critical illness cover has almost halved.

"A friend of mine who had quit a year ago told me about the savings – and I'm glad he did because I would not have thought about asking for a reduction," says the dad-of-four. "It was well worth the effort as it has saved me a lot of money."

Johnson, who is self-employed, saw the premium he was paying for his Co-operative Insurance mortgage protection life cover – a decreasing term assurance policy with a value of £46,000 – come down from £47.18 a month to £25.32.

And the monthly cost of critical illness cover – also taken out with the Co-operative – which pays out a lump sum of £44,000 should Johnson ever be diagnosed with such a condition – plummeted from £207 a month to £107.42.

That is a combined saving on premiums of £1,457.28 every year. "These policies seemed like a good idea to protect the family, especially as I had suffered a heart attack in the past," adds Johnson.

"You don't think about anything like that until it happens to you, but these policies cover me completely."

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