Personal Finance: Oh no - we're all going to die

Insurers would have us take out policies for every eventuality, but is the risk worth the cost? asks Harvey Jones
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The Independent Online
IF YOU listened to insurance companies you might have difficulty getting out of bed in the morning. Their sales pitch presents a world where we are in danger of a disaster that will destroy our health, happiness and financial security. Only insurance can save the day.

Motor insurance and buildings cover for home owners are essential, but what about all those other policies? Which are worth the money and which are a waste of time? We've looked at some of the heavily promoted products, and worked out when you should pay up for peace of mind - and when it's better to keep your cash.

Life insurance

Why? Pays a lump sum if the policyholder dies. Essential for those with children or other dependants. Couples with a joint commitment such as a mortgage should also have cover.

Sales pitch. "Peace of mind from just 30 pence a day."

Cost. Term life insurance pays out a lump sum if you die within a set period of time, usually 25 years (to cover your mortgage). Someone aged 30 wanting pounds 70,000 should pay less than pounds 10 a month.

Drawbacks. Many people underinsure. Buying pounds 100,000 of cover sounds a lot, but once the mortgage is cleared it will leave very little for surviving relatives. Cover for 10 times your income (or joint income) is ideal, though four or five times joint income is better than nothing.

Verdict. Term insurance is a good-value product that is actually getting cheaper. Whole-of-life cover, which includes an investment element and pays out when you die, is falling in popularity; the trend these days is to keep insurance and investment separate.

Private medical cover

Why? Provides private medical treatment for acute illnesses. Helps you beat NHS waiting lists for hospital operations and rest in a private room.

Sales pitch. "Once an expensive luxury, now it is not just for the wealthy."

Cost. pounds 30 to pounds 70 a month for a family of four buying basic cover, rising to between pounds 80 and pounds 150 for comprehensive policies. Premiums rise rapidly with age. Basic cover may exclude outpatient cover or limit treatment to a small number of hospitals. You can also cut premiums by paying an excess on any claim.

Drawbacks. Pre-existing medical conditions will be excluded for at least two years. Policies are complex, unregulated and difficult to understand. Many people are unaware of the level of cover they have actually bought until it is time to claim. And premiums just keep on rising.

Verdict. Fine for those who can't wait for treatment - the self-employed, for example. GPs now have a lot more power, so if you have an excellent doctors' practice you've won half the battle. Medical insurance is one for the wealthy.

Mortgage protection

Why? Mortgage payment protection plans take care of your monthly repayments if you become sick, disabled or unemployed. Protects your house against repossession if you fall on hard times.

Sales pitch. "Have you considered what would happen to your home if you fell ill?"

Cost. Typically pounds 5 or pounds 6 per pounds 100 of monthly mortgage payment.

Drawbacks. Self-employed and contract workers will have difficulty getting cover. Pre-existing medical conditions are excluded. Policies pay out for a maximum of one year.

Verdict. A poor product that needs improving. You would do better having an emergency fund to tide you over. The Government is considering making this type of cover compulsory for new borrowers.

Income protection

Why? Also called permanent health insurance, this provides a regular monthly income for those too ill to continue working. If you are seriously ill, benefits could be paid for many years, right up to retirement. It is intended to provide more extended ill-health cover than that offered by severely eroded state sickness benefits.

Sales pitch. "You have insured your car, home and holiday, but what about the income that pays for these pleasures?"

Cost. Around pounds 30 a month at age 25, rising to as much as pounds 100 a month in your 50s. Costs can be kept down by deferring payment of benefits for up to six months or longer.

Drawbacks. Increasingly expensive with age, although you should be able to buy a policy that keeps premiums at the same level for as long as you keep paying into the scheme.

Be careful to take cover for your "own occupation". This means the insurance will pay out if you can't go back to your old job. Otherwise the insurer may only pay you if you are unable to do any job. If you stay healthy, you will never see a return for all those years of premiums.

Verdict. The self-employed and those without company sickness cover should consider income protection. It is expensive, and many prefer to take their chances. This is understandable but risky if you are the sole earner or have a family to support.

Critical illness cover

Why? Provides a lump sum on diagnosis of a serious illness such as heart attack, cancer, kidney failure or stroke. The money can be spent on anything you choose - to clear the mortgage, pay for carers, or to have a holiday. Commonly sold with mortgage endowment policies.

Sales pitch. "You are three times more likely to suffer a critical illness than die before 65."

Cost. Monthly premiums start at pounds 25 for someone under 35 wanting pounds 100,000 of cover, rising to pounds 60 by the late 40s.

Drawbacks. Check carefully which illnesses are covered, as policies differ. This is not life insurance, so if you die within 14 or 28 days of diagnosis (depending on the policy), there is no payout. Only a few policies have an investment element, so if you don't claim, there is no other return.

Verdict. Simple to understand, with an attractive lump sum if you claim - which explains its recent popularity. If you have a family history of serious early illness, such as cancer, it may push up the premiums you are charged.

Long-term care cover

Why? Meets the costs of nursing or residential care for the elderly who can no longer cope on their own. Nursing homes can easily cost more than pounds 1,000 a month but the state will not provide if you have assets of more than pounds 16,000, including your home. Around 40,000 homes are sold each year to meet bills.

Sales pitch. "One in four of us will need care at some stage in our life."

Cost. Around pounds 30 a month at age 50, rising to more than pounds 70 a month after 70. Can also be bought with a one-off premium of between pounds 7,000 and pounds 10,000.

Drawbacks. Once you enter a home your life expectancy is limited, so much of your estate should survive anyway. Premiums are expensive and if you remain healthy you could pay them for many years without getting any return.

Verdict. May appeal to people without close relatives or a family history of heart attacks, strokes or disability. But that one in four figure probably overstates the danger and cover is expensive. The Government is reviewing its policy on long-term care, so unless your needs are pressing it is worth waiting to see what happens. A government-backed deal will almost certainly be better value than what's available now.

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