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Insurance: A necessary grudge purchase

Peace of mind for your family comes at a cost, Here are some policies to consider

Gulf News

ONLY three in five families could survive financially for more than eight weeks if they lost their main income, a shocking new report has revealed.

Yet only five per cent of workers have insurance that would pay out if they became sick and could not work, even though one in five are likely to be off for three months or more at some time before they retire.

Nine in ten do not have any cover that would pay out for a major illness such as cancer, a heart attack or stroke. And nearly two-thirds do not have life cover, according to insurer Scottish Widows.

Katya MacLean, protection expert at Scottish Widows, says cash-strapped households, prefer to spend on broadband, a car or mobile phone.

But protection insurance can be a financial life-saver. It is the most common and straightforward type of financial protection and pays a lump sum if you die. There are different kinds of life insurance, with some providing cover until you die, while others are for a set period such as the duration of a mortgage.

Peter Chadborn, financial planner at adviser Plan Money says: ‘In simple terms, life insurance is a promise to pay out a lump sum, tax free, in the event of your death within an agreed term.’ It can cost as little as a couple of pounds a month, but the final sum depends on your age, health and the type of policy.

Family income benefit is similar to life cover but instead of a lump sum it pays a regular income should you die.

Alan Lakey, a protection specialist from Highclere Financial Services, says the product is extremely valuable, cost-efficient and popular among parents with young children.

Single mother Linda Jones, 40, from Shrewsbury, Shropshire, took out family income benefit to provide a financial safety net for her son Jack, 12, in case anything happened to her.

She says: ‘I’d never thought about insurance before as I rent my home so I do not have a mortgage to protect. But I’ve just turned 40 and I’m a single mother so I wanted to make sure I had something in place for my son.’

Linda, a part-time accounts administrator for a local retailer, was drawn to family income benefit as she felt ‘it was the right cover and the right price’. The policy, which is for 11 years until Jack turns 23, costs GBP6.80 a month and would pay out GBP2,855 free of tax every three months.

ONE in five of us are likely to suffer a major illness before retirement, according to some studies. Critical illness insurance pays a tax-free lump sum if you are diagnosed with a range of illnesses, including cancer. In 2011 the average payout on a policy was GBP59,000.

Most providers cover between 40 and 50 types of illness, but it is vital you check the terms of a policy before you buy. Some cover only specific illnesses. For example, AIG Direct offers separate heart attack and stroke cover.

In the past, most providers would pay only if the illness was fully developed. But now some insurers pay at least something for an early-stage diagnosis. For example, you could get between 20 per cent and 25 per cent of the sum assured if you were diagnosed with early-stage prostate cancer and between 12.5 per cent and 50 per cent for early-stage breast cancer. Tom Baigrie, chief executive of protection insurance broker LifeSearch, says: ‘The number one issue when looking to buy critical illness cover is cancer, which represents more than 60 per cent of claims.

‘Some insurers include early-stage cancers, while others do not. The amount paid for less serious conditions is typically limited to around 25 per cent of the overall amount, but for many people this is better than a policy which only pays out on advanced cases.’

Richard Atherton, 30, and his wife, Liana, 33, of High Peak, Derbyshire, both have serious illness insurance a type of critical illness cover with PruProtect. The two primary school teachers, who met during their teacher training, have a three-year-old son, Finlay, and a 13-month-old daughter, Freya.

The couple have two single policies, for which they both pay about GBP70 a month, and each policy will pay out a lump sum of GBP129,000.

Richard says: ‘The only downside with critical illness insurance is that it costs quite a lot. We have to budget to be able to afford it.

‘But it’s peace of mind knowing that the mortgage is covered should the worst happen.’

Income protection pays out if you can’t work due to illness or injury such as a back injury or stress. Unlike critical illness insurance, it does not pay out a lump sum instead it will provide a monthly income of up to 70 per cent of your gross salary until you are healthy enough to return to work or retire.

It has never been a best-seller partly because it is seen as complex and pays out smaller amounts each month instead of one big sum.

It also has not helped that income protection has been lumped together with its inferior and notorious cousin payment protection insurance which has been widely mis-sold.

Graham Taylor, 41, from Derby, bought income protection to make sure he and his family would be able to keep a roof over their heads if he couldn’t work.

Graham says: ‘Fortunately, I haven’t had to make a claim as I am still fit and healthy. You might ask why I bother paying for it every month, but it gives me peace of mind.’

Before taking out income protection it is important to check what the policy covers. One of the key issues is whether the policy will pay if you cannot do your own job or if you cannot work at all. The most basic income protection cover would be based on your ability to perform certain activities. But the claims statistics for this type of income protection are so poor that many experts say that it should be banned.

Chadborn of Plan Money says: ‘Income protection is arguably the most important insurance anyone can have because if your income stops, so does everything you have to pay out for.

‘But just taking out a policy is not enough. You need to understand the definition under which a claim will be paid. I would urge anyone with an existing income protection policy to check the definition wording, while anyone taking out a policy should avoid any that do not offer cover on an ‘’own-occupation’’ basis.’

THE insurance industry had a reputation for trying everything to avoid paying out a claim, but it has tried to clean up its act. Alan Lakey says: ‘Declined claims are no longer the albatross they were. Cover is still not perfect and probably never will be due to human nature and our inability to recall health issues with full clarity.’

The failure to disclose something about your medical background and habits, such as previous illnesses or if you smoke, is the main reason why claims are declined. Not meeting the definition, meaning the condition isn’t covered or isn’t serious enough, is the second reason.