How to choose the right insurance cover
However, insuring yourself against the threat of redundancy is getting harder - and more expensive. The Post Office has hit the headlines recently because it has not only increased the cost of income protection for new customers but is also hiking premiums, and cutting the level of cover, for many existing customers.
Many of these policy holders took out policies during the boom years when the risk of redundancy was much lower but from next month they will see their maximum monthly cover reduced from £2,500 to £1,500. In addition, the first payment will arrive not 30 days after, but 90 days after redundancy.
AXA, which underwrites the Post Office's policies, is replacing the current premium, which costs £4.50 per month per £100 of cover, with a variable premium, which depends on individual circumstances, of up to £6.50 per month. This will add hundreds of pounds a year to the cost of some policies.
The country's biggest underwriter, Norwich Union, has also reduced its cover for unemployment-only policies and is also thought to have put up its prices. Other companies are responding to the economic downturn by taking advantage of a contractual clause which allows them to alter terms at 30 days' notice.
All of this comes at a time when this type of protection is needed more than ever: the number of workers making claims for redundancy doubled between November 2007 and November 2008.
So, what can individuals do to protect themselves?
There are different types of protection insurance so as much as anything, it's important to understand what each policy offers as you are then better placed to decide what you need.
Here, we take a look at all the types of protection insurance available, how they work and find if they are right for your needs.
Payment protection insurance
PPI, also called accident, sickness and unemployment (ASU) cover, can offer vital protection - it promises to meet your payments for a year or two if you are unable to work due to an accident, illness or redundancy. The miss-selling of PPI was recently investigated by the Competition Commission which in January recommended a ban on point of sale selling of PPI - the new regulation takes effect at the end of May.
Fortunately, the decision has encouraged a wider market for standalone market for PPI insurance - whereby you pick and choose the best policy for your needs from a range of sellers, as compared to one sold at 'point of sale' to you by the lender when you take out credit, a loan or mortgage.
There is clearly a demand for PPI - indeed, recent statistics from the Association of British Insurers showed a 118% increase in unemployment claims on PPI policies, demonstrating how the insurance can protect borrowers. The advice is to shop around for the best deal and ensure that the cover is appropriate and meets your needs.
It's vital to read the small print before purchasing PPI as there are common exclusions you need to watch out for. For example, the self-employed, students and housewives/househusbands are routinely excluded. Similarly, if you are unable to work due to certain conditions such as back pain or stress, you may find it's not covered. And perhaps most importantly in the current environment, you will not be covered against unemployment if there was a threat of redundancy at your place of work as the time the cover was taken out.
Many PPI policies also apply to specific products - mortgage payment protection insurance (MPPI) for example, covers home loan repayments. However, there are other policies available that will cover you for a specific amount if you are unable to work. Costs vary depending on your circumstances and your age, but are usually classified on a rate per £100 of monthly cover - so think carefully about the level of protection you require.
Prices are generally much lower if you buy through a stand-alone provider rather than adding protection to a loan, mortgage or credit card. For example, a 26-year-old male paying £750 a month on mortgages, £150 a month on insurances and £100 a month on utilities could pick up a policy for just £26 a month through iprotectinsurance.com (this gives you 12 months cover with a 30 day excess). You can compare rates on PPI and MPPI using our comparison tools.
Life insurance
No one likes to think that there will be a time when we are not around to support our loved ones but in fact life insurance is one of the wisest investments you can make if you have dependants. Importantly, it can offer incredible peace of mind for you and your family. The benefit of a lump sum upon death means that major debts such as a mortgage can be paid off. It can also offer financial security for your family and replace income for dependents.
There are two types of policy available - level-term cover and decreasing-term cover, also known as mortgage life insurance.
Level-term cover pays out a fixed amount should you die during the term of the policy - you will need it if you have a mortgage or large debts, along with dependants.
If you are married, be cautious when taking out a joint policy that only pays out in the event of the first death - check ALL clauses for what you are entitled to. Two separate policies should cost roughly the same price and both will offer payouts.
Decreasing-term cover is often sold in conjunction with a mortgage. As with a level-term policy, it pays out if you die during the term of the policy. However, the size of the payout decreases in line with your mortgage. This means that decreasing-term cover is usually cheaper than level-term policies. However, level-term cover is invariably the better option unless you are purposely looking to keep costs down.
How much cover should you take out?
This will vary depending on your circumstances and is likely to change as you get older - so do always update your policy and keep your provider aware of any major changes - including remarrying, moving home and major health events. Factoring in your age, health and lifestyle will give providers a good idea of how much cover you need. It is advisable to have enough protection to cover your outstanding mortgage at least. If you have children, you should also think about the cost of their upbringing and factor that in.
Don't forget other forms of life cover that you may already be paying for automatically too. Many people will have death in service benefit provided by their employer and this tends to offer life insurance of four times your salary. However, this may not be enough on its own particularly if you have a mortgage and/or a young family.
Remember that the later you take out life insurance the more expensive it tends to be. Policies are also higher if you are deemed a 'higher risk' - such as if you are overweight or a smoker. The terms and conditions of policies should also be checked thoroughly for exclusions, particularly relating to pre-existing medical conditions.
High risk? Being protected is what counts
If you are older or perhaps in one of the higher risk categories due to poor health or lifestyle factors such as smoking, you still need protection - perhaps even more so than younger individuals in good health. Don't be deterred from taking out cover - being protected is what counts. Paying a bit extra is much better than not having the ultimate benefit of protection which these plans bring.
You can use our life insurance comparison tool to compare policies.
Critical illness cover (CIC)
For many, the concept of developing a life-threatening or serious illness seems inconceivable. But ignoring the sometimes very harsh realities of deteriorating health can be costly.
Latest figures show that cancer and heart attacks now affect one-in-four men and one-in-five women before retirement age - and critical illness cover (CIC) is designed to ease financial pressures if you become seriously ill or are totally disabled.
Taking out CIC can be a very wise move and the younger the better as, again, premiums shoot up the older you get. CIC works in the same way as life insurance - except that it pays out on the diagnosis of a select group of illnesses. You should read the policy terms to see which types of illness are covered - in 2006, the Association of British Insurers (ABI) issued a statement of best practice for CIC clarifying all theterms and health conditions under which customers could make a claim. Always read the fine print and ask your broker to clarify any areas that you are not sure about. Generally, cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke are covered.
Most providers allow cover to be taken out between the ages of 17 and 70 for a specified period or it could be linked to your mortgage payments. You may need a medical check before receiving approval.
What should I cover myself for?
While it can be tempting to select cover for every serious illness there is remember that the more you cover, the more the policy is likely to cost. Instead, you should read the small print to know exactly what you're buying, check whether premiums are fixed or can be increased, look for a policy that covers children if they become seriously ill and use the key features document supplied by each insurer to compare what's available before buying.
Tip: When taking out CIC, consider including life cover at the same time as this can reduce the cost, as opposed to taking out stand alone CIC.
Income Protection - IP
Income Protection ((formerly known as permanent health insurance or PHI) pays you a regular tax-free income if you are unable to work due to sickness. Unlike PPI, it pays out indefinitely so it will cover you right up to retirement if needs be.
You are typically covered for a maximum of half your gross income but because it is paid tax-free it shouldn't leave you much worse off each month.
Many employee benefit schemes include Income Protection, but if yours doesn't, it is something you should definitely consider taking out as it could prove invaluable if you find yourself unable to work due to illness.
Tip: when considering taking out a policy take into account what your employer already offers in terms of sick pay. One way of keeping the cost of IP cover down is to have a longer deferred period. So, for example, if your employment contract includes six months' sick pay, ensure that your IP policy includes a deferment of six months.
Do note that IP is not an alternative to CIC (Critical Illness Cover) - the two compliment each other. If you can afford it, being covered for both IP and CIC is considered the perfect protection solution - so do shop around for the best deals.
Review your protection
As life circumstances change, it is really important to always review protection thoughout your life. From getting on the property market, getting married, having a family, divorce, a change of job, through to lifestyle changes or moving abroad - your protection needs may alter. So, finally, give yourself peace of mind and find the best policy and deal available.
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