Safeguard your family’s future by planning ahead

From life assurance to mortgage protection - it pays to be prepared, says Joe McGrath
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The Independent Online

With the new year and a new resolution to take control of the finances, many people are looking at how to protect the future wellbeing of them and their loved ones.

As part of the financial planning process, life assurance is a popular way to purchase a level of protection for you and your family in case the worst should happen. There are many products on the market, and some may be more appropriate than others, so conducting an assessment of your personal circumstances is the best place to start before diving in and buying a policy.

Philippa Gee, managing director of Philippa Gee Wealth Management, argues that, while life cover may not be the first financial product that springs to mind, it is possibly one of the most useful. “Life cover may seem fatalistic and not the most interesting of financial products, but it could take you less than half an hour to sort out and set up, giving valuable protection for your family,” she says. “For many people it is essential to have this in place, so if you don’t have the cover, do get it sorted out straight away.”

The reasons for not having cover in place vary. Some people still think that life insurance or critical illness cover is too expensive – particularly in the current “age of austerity”. However, the common misconception that life cover is too expensive for most people may be short-lived now that price comparison websites are bringing greater clarity to the issue than ever before.

Paul Richardson, an insurance specialist at NFU Mutual, says some people avoid the issue in the hope that the social services will look after them, while others are simply apathetic. But he says it’s not worth taking the risk when it comes to protecting family.

He explains: “If asked, most people would probably rank their health and life as a top priority, but surprisingly, may risk leaving their families unprotected financially by not having some sort of protection plan in place.”

Choosing a product

The most popular product is mortgage protection, which can have a set term, usually around 25 years, and a level of cover that will decrease each year along with the level of your capital repayment mortgage. As well as being the most common product, mortgage protection is also one of the cheapest. While the cover reduces each year, normally the premium remains fixed, although it is important to ensure that the level of cover remains adequate, should your circumstances change.

Homeowners can also combine this type of protection with a critical illness policy so that the mortgage can be repaid in the event of a specified illness. Philippa Gee says: “This type of cover is extremely relevant and, although this will increase the premium, it could provide much needed additional cover.”

Holly Heald, a financial adviser at Norwich-based Just Financial Solutions, says the most important thing for anyone to remember is to make sure your liabilities are covered.

Heald explains: “For most people, covering their liabilities is a minimum, yet studies suggest that as many as one in five people do not have adequate protection to repay their mortgage in the event of their death.

“Many people forget to consider loss of income should a loved one die, yet this can have a devastating effect on family life. With an average income of around £25,000 over a 10-year period, this represents a loss before inflation of £250,000.”

Mortgage protection can be arranged by your financial adviser, mortgage broker or bank, or you could even by a policy direct from the provider yourself.

However, it is worth remembering that anyone arranging a policy for you is likely to get paid a commission – unless they work on a fee basis – so look around at the different deals on the market before signing up.

Heald says: “The cost of insurance varies considerably between insurers, so always shop around. The right advice can pay dividends.

“It is also important to disclose everything. Your insurer may not pay out if you have failed to disclose all the relevant facts in your application. While the majority of claims are accepted, always disclose all the relevant facts.”

Online price comparison websites such as MoneySupermarket.com, BeatThatQuote.com and Compare|theMarket.com have become more sophisticated in recent years and remain a good place to start. For those who remain unsure about the right policy for them, a financial adviser or a broker will be able to assess your needs. The website Unbiased.co.uk can give you a list of experts that are closest to you.

Some mortgage holders may have previously have been discouraged from taking out protection due to last year’s adverse publicity surrounding mortgage payment protection insurance.

However, the Financial Services Authority stepped in to ensure that insurers paid redress last year and policy makers have since tightened up contract terms in relation to all mortgage protection contracts in the UK.

Those looking for a policy that goes one stage further than mortgage protection, might want to consider level term insurance.

These policies are where the term of the policy, premium and level of cover is fixed from day one, with the most common policies lasting between 10 and 25 years.

While the premium you pay is always the same every year, the cost for longer premiums will be higher, because the older you get, the greater the risk level. When calculating your premium, this is averaged into the price.

The majority of insurers will offer a renewal option at some point during the term, offering the chance to renew the policy for a fixed rate, although it is not uncommon for insurers to ask for further details of your current state of health beforehand.

In addition, you could choose increasing cover or a policy that would pay out an income rather than a lump sum on death. Such schemes are more commonly referred to as “family income benefit plans”.

Things to remember

Smokers and people suffering from health conditions will normally have to pay more for their premium, but they also have the most to gain when shopping around for the life assurance cover that suits them.

As well as sizing up all of the product providers that are on the market, it is also worth considering whether or not to apply on a joint or single life basis. A joint life policy insures two lives on a single basis compared to two separate life plans. With most policies, it will mean that the first person will receive a payout should the other die, or if they are diagnosed with a terminal illness within a specified time during the policy term. Joint policies are normally available to married couples, registered civil partners, cohabiting couples who have joint financial obligations or two adults that share a commitment such as a mortgage or a business loan. Gee says: “Single will cost you more but basically could provide you with double the amount of cover should you both die within the timeframe.”

For unmarried couples, it is essential that you have the appropriate arrangements in place to ensure that your money ends up in the right hands should you die. Without a will, your partner may not receive the benefit of the life cover you took out to protect them.

With that in mind, a trust can be a useful way to ensure that the right people receive the proceeds of a claim in a timely fashion, while it can also mean the tax savings are considerable. Once a policy is written in trust, it cannot be altered and, in such circumstances, it is important to consult an expert before arranging the policy.

When arranging any protection policy, it is always worth weighing up whether consulting a financial adviser would be helpful.

With many specialist products coming onto the market in recent years, some policies will be more flexible than others, so while a premium may look cheap at first glance, it may not cover everything you that you want it to. The Financial Services Authority’s Money Made Clear website cites examples such as death due to participating high-risk activities or extreme sports. In addition, if your health is poor when the policy begins, the provider may be within their rights to refuse cover altogether.

When discussing the terms of your policy with your insurer, you should also ask about the flexibility of the contract. You will need to ask whether you can increase or decrease the cover as your circumstances change and whether or not there is an additional charge for doing so.

Finally, if you already have cover and are now assessing the market for alternatives, remember to also reassess your personal circumstances. To begin with, check with you current insurer to see how much it would cost for a new contract. You can certainly expect the premium to be higher due to your older age or perhaps there are new medical conditions you may have developed.

To help you compare, it can be enlightening to check on the level of cover required to the level you requested when you first took out your current policy, all those years ago.

Reducing the benefits required will reduce your premium, but the insurer may insist on different exclusions too.

But, most importantly, do not cancel any existing cover until you have confirmation that you are fully covered by the new policy.

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