Life insurance
This is paid out on early death or diagnosis of a terminal illness that meets the policy definition during the plan term.
Ian Smart, head of product development and technical support of Bright Grey, says life insurance is essential if your client has dependents who would suffer financially if the main breadwinner died.
Critical illness
This cover pays out a sum of money that can be used to pay off the mortgage or provide financial support during a period of being unable to work. For people who don’t have a mortgage, Mr Smart says they will still need cover to pay their rent and other utility bills.
Mr Smart says: “Most policies these days not only provide critical illness cover for cancer, heart attack and stroke, but also provide financial assistance should a policyholder be diagnosed with a less severe form of an illness such as, an early form of cancer.”
Income protection
This should be taken out if cover is needed for a temporary sickness absence from work as this is not covered by a critical illness policy, according to Mr Smart.
Income protection pays out a monthly income when your client is unable to work through accident or illness and meets the definition of incapacity. There are several definitions of incapacity, for example being unable to perform your own occupation, or failing to do a number of defined work tasks.
As a result of recent campaigning, most new policies are written on an own occupation basis, meaning a client being unable to perform their specific job would qualify for a claim, but many historic policies may be written differently.
Saving
Bonnie Burns, product director of Legal & General, points out in order to make investments, specifically to provide a nest egg for your loved ones if the worst should happen, you would need to save tens, if not hundreds of thousands of pounds.
She says: “This is probably beyond what most of us could afford and if you could, saving it would probably have much greater impact on your lifestyle than the monthly premium of a life insurance policy.”
John Wilkinson, protection director of Aegon UK, also warns saving may not be cost effective, as interest rates on savings have been relatively low for a number of years.
While dipping into savings or relying on state benefits might seem like obvious alternatives to taking out protection, Ian Smart, head of product development and technical support of Bright Grey, points out these options do not cope well if recovering from an illness takes a long time.
He says: “Sick pay from an employer could help but might only last a few weeks and not all employers provide enhanced sick pay arrangements in excess of the minimum required by law.
“Would statutory sick pay or benefits from the state be enough for your client and their family to live on and continue the lifestyle they enjoyed before?”
Aviva’s latest Family Finances study showed that the typical family has less than £3,000 in savings, so while most people have a bit of a savings buffer, it is easy to see how this could quickly dwindle without another source of income coming in.
As well as handouts from the state or sick pay, Louise Colley, protection distribution director for Aviva, says customers might consider help from family and friends, or cutting back and managing on one salary as alternatives to family protection.
However, in reality Ms Colley says most of the things a parent does for free such as childcare or being the taxi driver would incur a cost if someone else had to do them. So even if the surviving partner is a high earner, Ms Colley points out these costs could still cause financial problems.
She says: “Naturally family and friends would do all they could to help in times of difficulty, but very few could commit to supporting another family long term.”
Peter Hamilton, head of retail protection propositions of Zurich, points out while many people believe the state will provide if they suffer an accident, sickness or disability these days benefits are designed to avoid poverty, not to maintain your lifestyle.
