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With the start of a new Millennium, now is an excellent
time to ensure that your income and assets are fully
protected for your loved ones. Although not an appealing
thought, anticipating critical events is probably
the most crucial part of your financial plan. No income,
no financial plan! So let's consider the main components
that go into making up a sound protection portfolio.
PERMANENT HEALTH INSURANCE (PHI)
Your monthly income provides the life-blood
to your financial plan and well-being. If it stops,
everything else stops, so how do you insure against
this? The answer is PHI, also known as Income Protection
Insurance - a form of protection that pays out a regular
sum if you are unable to work because of sickness,
accident or disability.
How will you pay the bills?
If you don't think you need it, quickly calculate
how much you would need to maintain something approaching
your current standard of living if your income stopped
today. PHI can provide up to 65% of your income, less
any state benefits and cover provided by your employer.
The payments are paid tax-free and commence after
a period that you specify - this is typically between
1 and 24 months. You can also decide whether, in the
event of a claim, you require the benefit payment
to remain level or to escalate annually. 1 in 15 of
the work-force have been off work for six months or
longer, due to sickness, accidents and disability
(Source: Department of Social Security 1998). Make
sure that, if it happens to you, you are fully protected.
CRITICAL ILLNESS PROTECTION
Critical illness protection is an insurance
that pays out on the diagnosis of certain specified
critical illnesses. 1 in 4 men and 1 in 5 women will
contract one of the conditions covered by a standard
critical illness product before they reach the age
of 65 (Source: Hanover Re 1998).
The critical factor
The illnesses covered vary from policy to policy,
but they usually include six core conditions: cancer,
heart attack/coronary bypass surgery, kidney failure,
major organ transplant, multiple sclerosis and stroke.
The total number of conditions now covered exceeds
some 30 different conditions.
The benefits to you
You would receive a tax-free lump sum payment,
generally within 28 days of the specified illness
being diagnosed. In the event of a claim caused by
a permanent disability, the benefit payment would
take a little longer, in order to establish whether
the condition was totally and permanently irreversible.
The financial consequences of not having critical
illness protection could be significant. Calculate
the size of your outstanding mortgage loan, liabilities
and the other financial commitments you would like
to protect and repay. Do you have a shortfall?
LIFE ASSURANCE
Life assurance is designed to do one of two
things: replace lost income or provide a capital sum
when it is needed most. So what are your options?
Level Term Assurance
Your policy guarantees to cover you over a fixed
term, specified at outset. A lump sum would be paid
out if your death occurred before the policy ended.
Term Assurance will not provide you with a cash value
when the policy ends, or if you surrender your policy
before the end of the term.
Decreasing Term Assurance
This is usually used in conjunction with a repayment
mortgage. You pay a fixed monthly premium, but your
cover reduces over the term of the policy. If your
death should occur before the mortgage term ends,
your policy would pay out a proportion of the sum
originally assured, which should be enough to pay
off the amount of capital still owed.
Family Income Cover
Another form of Decreasing Term Assurance. Your
monthly premiums remain the same throughout the whole
term, and the policy only pays out if your death occurs
before the end of the term.
The benefit is paid out as a regular income, which
is continued through until the end of the term. In
the event of your death, therefore, your spouse would
be in receipt of a regular income.
Whole of life cover
This type of cover guarantees to pay out a lump
sum on your death. Whole of Life policies can also
be used as a vehicle to plan for inheritance tax.
Maximum Cover offers a greater level of protection
for a reduced premium, but it is usually only set
for a period of, say, ten years. At the end of this
time, the plan is reviewed and the premiums could
be required to increase.
Standard Cover is another option. This should maintain
the same level of sum assured with no further additional
premiums, provided a certain level of investment growth
is achieved.
LONG-TERM CARE
If you or a family member has assets (including
the value of a property) in excess of £16,000, you
would be expected to pay the costs of long-term care
assistance in full, should you require it. With assets
of between £10,000 and £16,000, some assistance would
be available. When you bear in mind that annual nursing
home fees can cost in the region of £20,000*, and
even four hours of professional care at home per day
can cost as much as £13,840* a year, long-term care
planning is certainly an important issue, especially
if you are in your 50s or 60s.
(*Source: British Nursing Association 1999)
The care options
You can either pay monthly or annual contributions.
In the event of not being able to perform certain
activities of daily living (ADLs), as defined by the
insurance company, you would receive a payment. ADLs
are typically the ability to wash, dress, remain continent
and feed yourself.
Long-term care insurance bonds can provide on-going
care costs. The capital invested funds the cover and
may, potentially, preserve your investment as well.
Alternatively, if you have capital that you wish to
use, you could purchase income-generating bonds or
annuities to meet care costs.
ACCIDENT, SICKNESS AND UNEMPLOYMENT COVER (ASU)
Today, if you are unable to work because of
accident, sickness or redundancy, you will receive
no state help with your mortgage interest payments
for the first nine months. ASU is designed to cover
your mortgage payments for a period in this eventuality.
You select a 'deferral period', i.e. the number of
days or months that you want to elapse between your
becoming ill or redundant and claiming your cover.
PRIVATE MEDICAL INSURANCE (PMI)
If you are planning to acquire this type of
cover or would like to review your existing policy,
consider the following points.
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Decide
what level of insurance you require. For example,
some cover in-patient and out-patient treatment,
while others will only cover in-patient treatment. |
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You
should also be clear about what is not covered
under 'full cover' or 'full refund' policies. |
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Do
you want to include family members on your policy? |
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An
excess option can help bring down the cost.
This typically ranges from £100 to £500. |
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Check
that you will be covered for treatment in a
private hospital near to where you live. |
PROTECTION TIP
Consider writing your policy in trust - if
you die, the proceeds from your life insurance policy
will normally be paid into your estate free of tax.
But there could be inheritance tax (IHT) to pay if
your total assets exceed the 2000/2001 threshold of
£234,000. To avoid having to pay IHT on the proceeds
of your policy, you can arrange for the policy to
be written in trust for the benefit of the person
or people you specify.
Please contact
us to arrange a meeting or use our online
advice services to ensure you are fully
covered.
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