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What type
of Insurance Do I need?
Having life insurance or serious
illness insurance is an important component of financial planning. We have many
clients who are looking for advice on the appropriate insurance cover to have.
Many have realised that they have policies (usually purchased in conjunction
with a mortgage) that they don't really need. While everyone's situation
is different, the following different examples give a broad idea of what the
appropriate insurance would be given the personal situation.
1. Single person, PAYE employee,
homeowner.
All lenders will require that mortgage holders take out a
mortgage protection policy that would clear the mortgage in the event of the
death of the insured person, before the mortgage is cleared. However, lenders
would not require anything further insurance - although they may strongly
recommend some!
In the case of a single employee
who is depending on one income to cover their mortgage repayment, it would
be advisable to have some sort of insurance that protects them in the event of
an interruption to that income - whether it be because or accident or illness,
or because of redundancy. As a first step, they should find out what benefits
their employer would provide if they are unable to work. Some employers
may provide income continuation for a period of time. Others may have a serious
illness policy built into the company pension plan.
However, no employer is going to
provide insurance indefinitely, so the employee will have to have a plan to
cover their living expenses at some point. One option for many borrowers who are getting
mortgage protection insurance for a mortgage, is to get serious illness
insurance in addition to life insurance. With this insurance, the mortgage will be
cleared when the first event occurs i.e. serious illness or death.
This provides peace of mind as
the borrower knows that if they contract a serious illness, then the mortgage
will be cleared. However, since the bank would have first claim on the
insurance proceeds, this would not provide any cash to meet medical bills or
living expenses during time off work.
To provide this cash, the single
person could get (a) a separate serious illness insurance policy that is not
assigned to the bank or (b) an income protection policy to replace their income
while unable to work due to illness or accident. Most banks offer what's known
as mortgage repayment protection, where the mortgage payments are covered for a
set period of time (usually 1 year) due to illness, injury or redundancy. This
is the only insurance that pays a benefit for redundancy. However, some banks
require that this insurance is taken out when the mortgage is first drawn - not
at any time.
2.
Self Employed Person
For a self employed person, their income is dependent on them
being able to work. So, regardless of any loans, they should have some form of
insurance to cover living expenses in the event that they cannot work. The
most popular type of insurance taken here would be income protection. This
would provide a replacement income (usually up to 75% of regular income) upon
making a claim. Income protection premiums are eligible for tax relief, so the
net cost of this insurance is lower for the policy owner. The income paid out is
taxable then - the policy owner in effect gets a pay slip from the insurance
company who becomes the employer during the claim period.
As an alternative a serious
illness policy would provide a lump sum in the event of a claim. The benefit
paid out is tax free, as premiums paid do not get any tax relief.
3. Public Sector Employee
Employees are eligible for many benefits under the national
pay agreements so benefits such as income protection are most likely already
covered. Therefore, they should only need life insurance to cover any
mortgages. In the event of serious illness, their income protection package
should provide a benefit to replace income.
4. Company Director
In this situation, the company director should have control
over what insurance benefits the company will cover for him/her personally.
Many pension plane will offer a death in service life benefit (usually for a
multiple of salary) as well as income protection insurance. The company
itself would pay these premiums and claim tax relief on their corporation tax
return. As a result, the company director would need less insurance personally.
As can be seen from the various
examples above, there are situations where additional insurance is advisable and
other circumstances where people could have too much insurance as they may
already have some of these benefits through work. Check your own situation -
what would happen if you were unable to work due to illness or injury? Would
your income continue or stop? How would you pay for living expenses? Then decide
what insurance is appropriate for you.
To get quotes for the various
insurances mentioned in this section, click on the links below.
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