According to the insurer Aviva, more people have mobile phone insurance than critical illness cover, and more people have a satellite TV package than have life insurance. Now you’d expect a company that sells life insurance etc to say that we should buy it. But I think the research raises some interesting points. While I’m not of the ‘you should insure everything’ school of thought, I do think that life insurance can be useful. As is insurance that pays part of your salary if you can’t work because you’re ill.
Working out your priorities
The research from Aviva found that – among other things – more people have extended warranties than income protection, which pays your income if you can’t work). That’s a surprise because most people I speak to think extended warranties are a waste of money or a rip off (and many don’t rate mobile phone insurance).
SAVVY TIP: It’s definitely not the case that everyone needs life insurance. For example, if you have no debts with anyone else and no children or others who are dependent on you, it’s not something you need to buy. But many people think they don’t need it, when it’s worth having.
Questions to consider:
1. What would happen to my/our finances if I were to die? You may have a payout from work (it’s called ‘death in service benefit’). But some employers pay as little as one times annual salary.
2. What would happen if my partner/husband were to die?
3. Could I cope financially if I couldn’t work for months or even years? You may have a generous employer who would pay you for a year or two. But you may have to rely on statutory sick pay or employment and support allowance if you’re self employed.
Which policies to consider
Once you’ve worked out where you’d experience a drop in income, or would be left with a large debt to pay, the next stage is to decide which insurance could help plug the gap.
- Life insurance pays out when you die, if it’s a ‘whole of life policy’, or if you die within a certain period if it’s a ‘term’ policy. Term policies are a cheap option, costing around £5 a month for a 35-year-old woman (or man) to take out a 25-year policy for £100,000 of cover. It normally pays a lump sum. But there is a policy called ‘family income benefit’ which pays out a monthly income. It’s a good option if you want to cover the cost of, for example, childcare or to replace someone’s wages.
SAVVY TIP: Insurers haven’t exactly got a great reputation and some people think these policies don’t pay out, but that’s not true. There have been problems with some people having a long wait for payouts, but the industry has taken action to speed up life insurance payouts. There’s more information on when you might need life insurance, and when you don’t, in the article entitled Do you need life insurance??
Income protection. Pays out if you cannot work because you’re ill. These policies are more expensive than simple term life insurance. If your employer doesn’t have very generous sick pay or you’re self employed, income protection can be invaluable. I took out a policy years ago when I went freelance because I didn’t want to rely on state benefits if I fell ill. However, income protection policies vary widely.
SAVVY TIP: I’ve written an article about What to look for if you’re buying income protection insurance and How to choose the right income protection policy. The key thing is not to buy the cheapest, but to look at how ill you’d have to be before you can claim. Some will pay out if you can’t do your own job or a similar job, others only if you fail specific ‘activity’ tests. I’d also recommend opting for ‘guaranteed premiums’ (which won’t go up by more than inflation). It can be more expensive at the start but you won’t have the nasty shock of a rise in premiums after a few years.
Critical illness insurance. Pays out a lump sum if you’re diagnosed with a serious illness. The ‘catch’ is that policies don’t cover all illnesses, although most have to pay out if you’re diagnosed with one of around 30 different illnesses. Around 97% of claims are paid out (as of 2015). Some companies cherry pick and target people who are in the best of health, while others include cover for children. This is one area where it’s really worth taking advice and not shopping around on the basis of price alone.
SAVVY TIP: I’ve written an article on critical illness insurance, what to look for and what to avoid, elsewhere in this section. I’ve also written an article about the small print of critical illness insurance.
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