Protection insurance: what you need to know

The coronavirus pandemic has made a lot of families, in the UK and across the world, painfully aware of how important it can be to have a financial safety net if something goes wrong. And most of us simply don’t have one.

Insurance brokers and price comparison websites were overwhelmed with enquiries about income protection insurance back in March. So is it time you thought about getting some cover?

You can find more information on all types of protection insurance on the Money Helper website. If you decide that you’d like to get help from an independent financial adviser Unbiased.co.uk can help you find a suitable one near you.

What’s the difference between life insurance, income protection, critical illness cover and PPI?

Life insurance

Life insurance pays out a lump sum, or in some cases a monthly income, when the person covered by the policy dies. If you have dependents life insurance is a good way to ensure that they are taken care of financially if the worst was to happen to you.

The price you pay for a life insurance depends on a number of things, including the amount of money you want it to pay out, the length of the policy, but also your age, your health, your lifestyle, and whether you smoke. It’s a good idea to shop around and check exactly what is covered for the level of the monthly payment.

There are different forms of insurance depending on what sort of financial protection you’re after. For example:

• Level term life insurance pays out a fixed amount if you pass away within a specific period of time, to give you peace of mind that your dependents will be financially taken care of if something happens to you. This type of insurance only pays out if you die within the term – and has no value after that.
• Whole-of-life policies are mainly used to cover any inheritance tax bill left behind after your death. Because this type of insurance always pays out, whether or not it is good value depends on how long you live. If you live longer than expected then you may pay more in premiums than the policy pays out.
• Mortgage decreasing term insurance is designed to pay off your mortgage if you die during the mortgage term. It sits alongside a repayment mortgage so the amount it pays out goes down to match the mortgage balance. The policy is usually timed to end when the mortgage is due to be paid off.

Income protection insurance

This form of insurance is designed to replace some of your income if you’re unable to work due to illness or injury – especially if you’re not entitled to sick pay, for example if you’re self-employed. You can also get short-term income protection insurance, which provides the same sort of cover but only for a specific period of time – such as 12-24 months.

Critical illness cover

This is a narrower form of insurance, which will pay out a tax-free lump sum if you become ill with certain types of life changing health condition – such as cancer, heart disease and strokes. Critical illness cover can be purchased as a standalone policy, or as an add-on to life insurance.

Payment protection insurance (PPI) and Mortgage Payment Protection Insurance (MPPI)

Although PPI is perhaps best known for being mis-sold, it can be useful if it’s suitable for you. It’s designed to pay out enough to help you cover key bills and repayments if you can’t work due to illness or redundancy. Many lenders offer it to cover your mortgage repayments, but you can also buy standalone PPI to make sure you have enough money to cover your key bills if you’re unable to make your payments for reasons stated in your policy.

So what kind of cover do I need – and will it help me during this pandemic?

It really depends on your circumstances – and, of course, on your future circumstances, which aren’t always possible to predict. The best thing you can do is think about what the worst-case scenario would be for you, your finances and your family, and then look into policies that would best cover that situation. Here are some things to think about.

• Life insurance usually only covers death – if you can’t provide for your family because of illness or disability, you won’t be covered. If you have a mortgage and dependents, then it’s a very good idea to have life cover in place. If you have no dependents, you might not need life cover at all.
• If you could get by on sick pay, redundancy pay and so on, you may not need income protection insurance. However, if you think you might be unable to cover your rent or mortgage and other household bills if you couldn’t work due to illness then this type of cover is worth considering. It’s likely that any new long-term income protection policy you take out now will have an exclusion period to prevent any COVID-19 related claims during this time.
• Critical or serious illness policies only pay out if you become ill in a way specifically stated in the policy. If you’re thinking of choosing critical illness cover, you should probably speak to a financial adviser.
• Despite the poor reputation payment protection insurance can be a good option to allow you to cover key bills such as your mortgage if you lose your job or are unable to work due to illness. If you’re already unemployed, or if there is any other way you’d be able to support yourself if you were out of work (such as sick pay, employee benefits or support from family), you might not need this.

Can I pay for this cover during my debt solution?

Even though you are on a debt solution, you should still plan for the future and think about the protection you might want to put into place for you and your family. Your creditors will usually accept this and will allow room in your budget for reasonable insurance premiums.

If you had cover in place – for example to cover your mortgage – and you missed premiums or cancelled the policy due to your financial difficulties, you might want to see if the policy can be re-instated.

If you’re thinking about taking out (or re-starting) protection insurance to protect you and your loved ones, speak to your Personal Finance Manager or Relationship Manager about how this can be incorporated into your debt solution.