Is your family protected?
According to the Office for National Statistics, six million Brits are already living in a household where no-one has a job and official figures show that the numbers seeking Jobseeker's Allowance rose by 15,500 in June to 840,100. With Capital Economics predicting that a further 900,000 will be out of work by the end of 2010, increasing the total unemployment rate to 2.5million, it's time to take a serious look at what would happen to your family if your circumstances were to change.
The solution could be protection insurance, which comes in many forms including payment protection insurance (PPI), which is also known as accident sickness and unemployment (ASU) cover, life insurance, critical illness cover and permanent health insurance. In an ideal world perhaps we'd take out insurance for all of these areas to offer real peace of mind, but the reality is that affordability is an issue and the premiums are simply too high.
So how do we know which type of cover to choose and what should we look for in a policy?
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. In recent times PPI has come in for widespread criticism with the Competition Commission suggesting that policies are widely mis-sold alongside loans and credit cards. It suggests that around a third of those that have a policy would be unable to claim due to their employment or medical situation.
The key with PPI is to check your situation before you apply. For example, you will not be covered under the unemployment terms of the policy if there was a threat of redundancy at your workplace at the time the cover was taken out. Likewise, pre-existing medical conditions may not be covered if they reoccur within certain timeframes. Some policies have an exclusion period for as much as six months - meaning you would not be able to make a claim for at least half a year after taking your policy 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 £13 a month through getMY.com. You can compare rates on PPI and MPPI using our comparison tools.
Permanent health insurance
Also known as income protection, permanent health insurance (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.
The maximum cover you can have is typically 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 PHI, 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.
Life insurance
Our own mortality is never a pleasant subject to think about, but life insurance can be vital for our families when we are no longer there to support them. It can replace income for dependents, pay expenses such as the mortgage and provide some welcome financial relief at a time when your family is likely to need it the most.
Life insurance pays out a lump sum in the event of your death. 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. However, couples should be wary of taking out a joint policy that only pays out in the event of the first death. 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
The amount of cover you need varies. 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.
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.
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.
You can use our life insurance comparison tool to compare policies.
Critical illness cover
Serious illnesses, such as cancer and heart attacks, 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.
Broadly speaking, 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 2003, the Association of British Insurers (ABI) tightened the conditions under which customers could make a claim, for example, tumors that have not invaded an organ or tissue may not be covered. 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.
It can be tempting to pick up cover for every serious illness there is - but 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.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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