Living protection in view

by Cheyne Wilcocks MSc, DipPFS | 22nd July 2019 | Insight

I am going to take a look at the two main options available when considering protection when living, critical illness cover and income protection. Firstly, I'll start by outlining what each option offers, take a look at a case study to illustrate how each option might work and conclude how their differences may influence your priorities when considering living protection.

Critical illness cover (CIC)

CIC is a term assurance product. This means it has a fixed term and a sum assured agreed at the outset. The provider will consider a claim to a payout of the sum assured as a lump sum if the life assured is diagnosed with a critical illness. For such a claim to be successful the diagnosed critical illness has to be on the prescribed list of critical illnesses that form part of the policy conditions that would have been disclosed to you before application.

All life offices have differing policy conditions and varying qualifying critical illnesses lists. However, all should have the core conditions included -

Cancer - excluding less advanced cases
Heart attack - of specified severity
Stroke - resulting in permanent symptoms

Source: ABI guide to minimum standards for critical illness cover

Life office critical illness lists extend further than the core conditions mentioned above building into quite extensive lists. Once the policy has paid out the sum assured on a successful claim the policy ceases to exist, that is to say, you can only have one successful claim with this type of policy.

Income protection (IP)

IP is a life policy with a fixed term and a sum assured agreed at the outset. The sum assured will be a monthly amount that will be paid to you whilst you qualify to receive it. In general terms the qualification is if you suffer financial loss due to being unable to work because you are too ill and/or suffered a disability. A policy can be set up to only consider work in your chosen profession, the definition of 'own occupation'.

The type of policy I will consider here is one that will pay until the end of the term of the policy. That is to say you are not restricted in the amount of successful claims you can make with this policy within its term.

Consider the following illustrative scenario

Let's assume two professionals, each aged 35 years, both with outstanding mortgages of £200000 with 20 years left to pay. They both have essential monthly expenses of £2000 per month.

One decides to take out CIC for a term of 20 years to cover the term of the mortgage with a sum assured of £200000. The other decides to take out IP for a monthly sum assured of £2000 based on his own occupation until his 70th birthday. Let's assume the costs of such living protection policies are similar.

Within two years of taking out the policies both suffer a stroke leaving them with permanent disabilities rendering them unable to continue with their own occupations. Their employers will stop paying them any form of sick pay after 6 months being away from work.

The professional with the CIC policy gets a payout of £200000. Due to his disabilities he decides to use £50000 to alter his home to facilitate his disabilities. He uses £100000 to pay down his mortgage and the remaining £50000 to provide an income. However, he knows this will not last forever and the 6 months his employer will continue to pay him will fly by. He is hoping he will recover to a point where he can take a job that will provide for his essential living expenses unitl his retirement.

The professional with the IP knows his policy will start paying £2000 per month after his employer stops paying him after 6 months. The income is a lot less than he is used to but his essential living expenses will be met until such time he can return to his own occupation or until the policy term comes to an end on his 70th birthday. Unfortunately he has no capital to improve his home to facilitate his disabilities and can't consider moving to a more suitable property as there isn't enough equity in the property to do so. He is finding it a challenge to continue living in his home unaided.

Prioritising

So from the illustrative scenario above, which seems more palatable? Difficult isn't it? A huge majority of us have a finite amount of money and need to budget for protection. When working with a tight budget prioritising leads to some tough decisions. The above illustrative scenario considers two single males. Now consider how this scenario will impact your loved ones or loved ones you yet to meet. The worst decision would be to consider yourself invincible and decide to do nothing. It is important you understand that you will find it extremely difficult at best and impossible at worst to gain any kind of living protection with a record of poor health. If you are in good health now is the time to arrange such policies as now is the time you will get the best terms offered.

Lawrie Mortgages will help you decide your priorities and recommend protection that best suits your needs and circumstances. Any recommedation will fit within your budget. What's more we will continue to review your needs throughout our relationship ensuring you have the most appropriate cover.

You can start your enquiry by arranging a callback.

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