When many people think of financial planning they think about savings, investments, or their retirement. An area that is not top of the list when people think of financial advice is insurance, but that’s not to say it’s not a vital component of sensible financial planning.
There are three main types of financial insurance that everyone should consider: life insurance; critical illness cover; and income protection.
If you die, life insurance will pay your dependents a lump sum or regular payments to ensure they continue to be looked after if you’re not there to provide for them. It lessens the financial impact that death could have on loved ones.
You can choose how much it will pay out, which will depend on the type or level of insurance cover that you buy. It’s up to you to decide how it is paid out in the event of your death and who the beneficiaries are. In general life insurance should be considered by anyone who has dependents, like children or a partner who depends on your income.
There are two types of life insurance policy.
Term life insurance gives you cover for a specific period of time, for example, 10, 20 or 40 years. The length will affect the size of the premiums. Term life insurance only pays out if you die during the policy and there’s no lump sum payable at the end. It can be used to cover the term of a mortgage, or to make provisions for supporting a family until children reach adulthood.
Whole-of-life insurance will pay a lump sum to your family whenever you die. You choose the amount you would like it to pay out and then pay a monthly premium accordingly.
Critical illness cover
Critical illness cover is a long-term insurance policy which covers you if you suffer a serious illness. The policy will list the illnesses it covers and if you get one of these illnesses, the policy will pay out a tax-free, one-off payment.
The aim is to minimise the financial impact of any incapacity that this illness might bring and provide for you to, for example, pay off your mortgage, or make any alterations to your lifestyle necessary as a result of the illness.
It’s important to check which illnesses are covered, but these policies usually cover illnesses like: stroke; heart attack; certain types and stages of cancer; conditions such as multiple sclerosis or Parkinson’s disease. Many policies will also consider permanent disabilities as a result of injury or illness.
If you already have a pre-existing medical condition, you will want to seek an insurer that will be prepared to cover it, although this may mean you will need to pay more for the policy. When applying for critical illness cover, it’s important to provide all relevant and correct details as failure to do so may mean the insurer refuses to pay out.
Income protection insurance is often overlooked by many. If you ask someone what their biggest financial asset is they will probably say their home if we’re talking material things, or their pension fund or investment account when it comes to their financial plans. However, for many their future ability to earn an income is their biggest asset.
If you can’t work because of illness or disability income protection pays you a regular income until either you are able to return to paid work or you retire. It can provide cover for both employed and self-employed people. It’s different from critical illness insurance, which pays out a one-off lump sum if you fall ill.
Irrespective of whether or not you have dependents, if incapacity would restrict your ability to earn a living, then you should consider taking our income protection insurance.
Not only do these policies provide you with the financial support to minimise the financial impact of death or illness, they provide you and your loved ones with priceless peace of mind.
As with all areas of financial advice, getting the insurance policies that are right for you is vital and it benefits you to work with a financial adviser in choosing the appropriate cover and level of protection you need for your specific circumstances. If you would like some help with this, please get in touch.