If you’re a homeowner, it’s a good idea to have some kind of life and/or illness cover. This is because if something happens to you, you or your loved ones may need assistance to keep paying your mortgage. They may also need help to cover other expenses. Additionally, you might decide to explore some of these options even if you’re not a homeowner, especially if you have dependants who might need support. For more on the other kinds of insurance you might want to purchase, read our blog here.
This article sets out the different types of life, illness and income protection out there to help you choose between them.
At a glance
|Insurance||What is it?|
|Life insurance||Pays to your family or beneficiaries if you die.|
|Critical illness cover||Pays a lump sum if you have a serious illness.|
|Income protection||Pays a portion of your income or specific bills/debts if you can’t work.|
Life insurance pays out a lump sum to your family or named beneficiaries if you die. There are three main types of this insurance:
- Level term: this pays out a fixed sum if you die within the term of the insurance (a pre-agreed period)
- Whole of life: this covers you for your whole life.
- Mortgage protection: this will pay the remaining amount on your mortgage when you die. Therefore, the amount should go down over time, unless you change your mortgage debt partway through (by moving or remortgaging).
Life insurance is particularly important if you buy a home with a partner or you have dependants. There may be conditions on payouts, such as the way you die (e.g. a death caused by your purposeful actions wouldn’t be covered). You may also face higher premiums depending on your age, existing medical conditions and habits like drinking or smoking. But if the worst should happen, it will ensure your loved ones aren’t saddled with huge bills.
Critical illness cover
Critical illness cover will pay out a lump sum in the event of you suffering from a serious illness or disability. This will help you cover your expenses if you can’t work or need special treatment.
It usually needs to be a condition from a list provided by the insurer, and one that is long-lasting and may cause you to stop working, such as heart disease or cancer. The other limitation of critical illness cover is that the lump sum may not be enough to cover all your expenses, especially if you are unwell for a long time. However, it can be cheaper than other forms of income and illness protection.
Income protection insurance will pay you a portion of your income if you can’t work due to illness, sometimes for a set period of time or sometimes for the rest of your life. There’s usually a deferral period during which you must wait for payments, and reducing this time will make your premium payments more expensive. However, the advantage of this type of insurance over critical illness is that you can claim multiple times within the duration of the policy.
You can also get Payment Protection Insurance or Mortgage Payment Protection Insurance, which are forms of income protection. The former will cover your monthly mortgage bill and repayments on loans and credit cards, whereas the latter can only be used to pay your mortgage. These are usually short term policies rather than whole of life cover.
You might not need income protection if you would be able to survive on statutory sick pay, or if your workplace offers a more generous sick pay package. You might also have enough savings, or be able to rely on loved ones. But in order to maintain your lifestyle and keep up with your important financial commitments, income protection might be a good idea.
How do I decide which protection insurance to get?
You should check what’s on offer from your employer before you make a decision. Your employer might offer enhanced sick pay or death in service cover (which pays out a lump sum if you die while employed by your company). You should examine these closely to check what’s excluded from cover, and how much you’d get.
You should also think about how much you need to cover your important financial commitments such as mortgage repayments, and how much you have saved. Having other debts like loans and credit cards might make a difference, too. Your usual emergency fund may not last very long if you’re not able to work for some time. Finally, if you have dependants, you need to weigh up the importance of providing for them if the worst should happen. You might be able to get a combination of insurance types – for example, critical illness plus life insurance.
Whatever you decide, having some form of protection insurance is a good idea.