Financial Planning

3 types of financial protection insurance you need to know about

28 October 2021 | Posted by Claro Money
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When life doesn’t go to plan, it’s important to be able to have a back-up plan. Financial protection insurance can give you the financial security you need to make ends meet when the unexpected happens. For example, if you find yourself unable to work or develop a degenerative illness. Find out which financial protection policy could be right for you and your family with our simple guide.

Income protection insurance

Income protection insurance provides cover if you’re unable to work due to illness or injury. You’ll be given a proportion of your lost earnings as a monthly payment. This is to help you pay for your outgoings, such as rent, bills and food. That way, you can stop worrying about the financial side of things and focus on your recovery.

How much will you get?

Income protection generally pays out 50%-70% of your earnings before tax, and it’s tax-free. 

The reason you can’t cover 100% of your earnings is because the benefit is based on your gross earnings, but paid to you net, so if they covered 100% you would actually receive more than you usually did in your job. 

What doesn’t it cover?

Income protection insurance doesn’t always cover every illness. For example, pre-existing medical conditions might be excluded from the policy. 

What’s the cost?

How much you pay for income protection insurance will depend on:

  • How much you are covered for (benefit amount) 
  • Your age
  • Your job
  • How long the policy would payout for in the event of a claim (e.g. 2 years or until retirement)
  • Your health
  • When you want the payments to start

Generally, the longer the policy, the more it’ll cost you. You can typically expect to pay between £50 – £80 a month, although it can be as low as £10 a month. 

Before you apply for income protection insurance, make sure that:

  • Your employer doesn’t already offer it as part of their benefits package
  • You take a look at your basic sick pay – you may not have a specific income protection benefit but may receive 3 months sick pay 
  • You’re not already covered via another insurance policy or your mortgage, if you have one
  • You’re confident that you couldn’t rely on your savings to cover you instead. If you’re not sure how long you’ll be out of work for, it’s best not to plough through your savings.*
  • You’ve checked whether you’re entitled to government benefits that could cover you – although these tend to be low amounts 
  • You’ve checked whether family or friends could support you

*It’s recommended that you don’t dip into your emergency fund to cover incidents like these, unless you have absolutely no other option.

Life insurance

There are a number of different types of life insurance. But the basic idea is that it lets you leave money for your loved ones if you die. For example, from natural causes or an accident. This could be used to support them for as many years as necessary, to replace lost income (if you were the main money-earner, for example), or to pay off a large debt like your mortgage.

The types of life insurance policies:

  1. Term assurance – The most basic policy on offer, you choose the amount you want to be insured for and the period for which you want to cover.
  1. Family income benefit policy – This is a decreasing term policy that pays out a regular monthly income to your beneficiaries until the policy’s expiry date if you die.
  1. Whole-of-life policy – An ongoing policy that pays out when you die. It’s more expensive than a term assurance policy as you don’t have to pass away within a certain timeframe.

What’s the cost?

You pay a monthly premium for life insurance, the cost of which depends on:

  • Your age
  • Your health and lifestyle
  • The length of cover and amount 

Use this life insurance calculator to get an idea of the level of cover that’s right for you.

What doesn’t it cover?

Depending on your policy and provider, you might not be covered if you die while taking part in a risky activity. For instance, if you’re rock climbing or scuba diving. That’s because these kind of hobbies are considered dangerous and have a higher risk of death.

Do you need it?

If you have any financial dependents (such as children or a spouse who doesn’t work), then having some form of life insurance is a good idea. This is particularly true if you’re the breadwinner for your family, and you don’t think they’d be able to cover the basic costs of living if you weren’t around.

Critical Illness Cover

With Critical Illness Cover (CIC), you’ll get a tax-free lump sum of cash if you’re diagnosed with a certain disease or disability. This usually applies to very serious or long-term conditions, such as cancer, heart attack or a stroke. You might have other income during this time (like government benefits), so you can spend this lump sum of money however you like.

What’s the cost?

The premiums for CIC can be quite expensive, and you won’t get your money back if you don’t make a claim. For example, the cost of £100,000 of CIC for a 30 year old non-smoker in good health for 20 years is likely to cost around £20 a month. So it’s best to make sure you can afford it before you take out a policy. 

Much like the other policies, the price you pay will depend on:

  • Your age
  • Whether you smoke or have ever smoked
  • Your health (including weight and family medical history)
  • Your job (some are higher risk than others, pushing the premiums up)
  • The length of cover and amount

What doesn’t it cover?

Not every illness is covered by CIC. And you generally have to be very seriously ill or disabled before you can claim. It’s best to check the terms with your provider.

Do you need it?

Before you take out a policy, it’s a good idea to check:

  • Whether you’re already covered by another insurance policy, or by your mortgage (if you have one)
  • If your employer pays out any benefits in the event you become seriously ill or disabled
  • Whether you could use your savings instead

Want to learn more?

Book a session with one of our Financial Coaches to discuss the pros and cons of each type of insurance.

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