Health and family life
This section of our site looks at the insurance and assurance policies you may want to consider in order to protect you and your dependants against the financial disruption caused by your critical illness or sudden death.
Life Assurance is used primarily to provide money for those who may be financially dependent on you, such as family and business partners, should anything happen to you.
Even if there are no dependants who may be financially disadvantaged by your death, life insurance could go towards covering funeral costs.
The following are all situations that may require the use of life assurance:
- Mortgage. If the house is to be lived in by your partner or children then it is normal practice to ensure that the mortgage is cleared on death.
- Money for dependants. If you have financially dependent children then money will help provide for them, perhaps by allowing the surviving partner to stay at home or work part time for some years.
- Business debts. Banks and creditors are cautious when key business professionals are no longer around. Credit lines get shortened or even pulled, often with fatal consequences for the business. If you are a key person your business could insure you to provide cash flow to settle all debts and recruit a new person.
- Business partners and co-directors. If you die you hope that your colleagues will pay a fair value for your share of the business, but they can only do this if the funds are available. Assurance can be used to provide this.
The good news is that many people already have some life insurance and in many cases this will suffice for their needs, although as needs and circumstances change, it may need updating.
If you are a member of a company pension scheme, read your benefits booklet. You may well find that if you die your spouse and/or children will get a lump sum and/or a pension. If you provide us with the details we can calculate the benefits and make sure that they will be sufficient. One problem with older schemes is that unmarried partners are not always treated as a spouse.
You have probably already got life insurance to cover your mortgage, but it would be worth checking that the current level of cover is sufficient for your current needs and situation.
If you are not in a company pension scheme and are self-employed or in business, and have dependants, then it is essential that you have your position assessed. We can help you do this.
Life assurance (protection)
There are many types of life assurance policy, all with different features and benefits. The aim of good planning is to ensure that the policy coverage matches the risk.
The main elements in a policy and its pricing or cost are:
- Term– for how long is the protection needed? This might be known (eg until a loan has been settled), or estimated (eg until the children are old enough to support themselves, say aged 18 or 21).
- Amount (‘sum assured’) – If you borrow £100,000 on an interest only mortgage, you will owe £100,000 right up until you pay the mortgage off. But if you have a repayment mortgage the amount you owe decreases every year as you slowly repay the debt. In that case you need a policy where the cover decreases as well (this will be typically cheaper than one where it doesn’t).
- Investment– Whether or not the policy includes any element of investment.
- Convertibility– Whether or not you need the ability to change the type of policy after it has commenced.
- Who– Who is to be insured? Their age, smoking/drinking habits and state of health will be important in determining the cost.
- When– When does it pay out? If only one person is being insured it will pay out on death, but if two (or more) people are being insured, does it pay out on the death of the first person or the second?
These elements will be explored in subsequent pages, as we highlight the main types of policy. (In theory you can have a policy built to fit any need, but unless you have very significant assets and complex affairs, the policies described in subsequent pages should suffice).
Term assurance policies
At their most basic these are policies where you have a fixed sum assured for a fixed period of time, e.g. £100,000 for 20 years.
If you survive the term, you get nothing. There is no element of investment.
As a rule, if you need to make any changes these will be at the discretion of the insurance company, (though some contracts will allow special occasion changes, such as being allowed to increase cover if you have a child).
- Cost – they are the lowest cost for protection, and if you have a requirement for a simple insurance of this nature you get maximum value for money
- Uses – for covering fixed or estimated liabilities, often used to cover debts such as mortgages.
One important use is for companies to insure their important staff members. If that person dies the company gets an injection of cash to help it keep going (for a small company the loss of a key salesman or designer could significantly harm the firm, and would at the very least present a massive and distracting management problem as an attempt is made to keep everything going).
Term policies may also be increasing (e.g. in line with inflation), decreasing, convertible, renewable (in that at the end of the term you could keep it running), but the main options and types are detailed in the following pages.
With such policies there is no surrender value and cover will cease if premiums are not paid.
Family income protection policies
Family income protection policies are also known as family income benefit (FIB). These are term assurance policies specifically designed to meet the needs of parents with (or planning) children.
They provide for an income payable from the date of death until a fixed time in the future (e.g. the youngest child’s 25th birthday).
So, if you have a £20,000 per annum 25-year FIB policy and you die the next week, your family gets £20,000 for 25 years = £500,000 in total.
If you die when the child is 20, your dependants get £20,000 for 5 years = £100,000 in total.
As you can see, this means that the older you get, the less life assurance you actually have. This keeps the costs down.
- FIB policies might have extra options (for example to take account of inflation the income might rise each year).
- You might be given the option of having a lump sum instead of an income. (The lump sum would be the discounted value of the income. In essence, if given the choice, you look at the numbers and make your choice at that time).
- It is normal to opt for a 25 year term if you expect to have more children in the future. This ensures that your future youngest should at least be covered through university. If, however, your children are already at school and no more are planned, clearly shorter terms will be used based on what is actually expected to happen (e.g. is university a likely option, or will they be seeking employment at 16 or 18?).
It is often the case that 2 single life policies are only a little more expensive than a joint life policy. Always get three quotes (father’s life only, mother’s life only, and a joint life one). In order to select the most suitable option for cover, we recommend that you speak to your financial adviser.
With such policies there is no surrender value and cover will cease if premiums are not paid.
Decreasing term assurance policies
A decreasing term assurance policy is a type of policy that pays out a lump sum on death, with the sum assured decreasing over the term of the policy.
They are commonly used to cover debts where the outstanding capital decreases over time, or to cover a potential liability to inheritance tax when a gift has been made.
With such policies there is no surrender value and cover will cease if premiums are not paid.
Convertible term assurance policies
Convertible term assurance policies are life assurance policies with a specified term.
Once the term has expired the policyholder usually has the choice to convert the policy to a different type of contract, which can be a further term assurance policy, an endowment or a whole of life assurance policy.
Whole of life policies
These are policies that are designed to provide life assurance for the whole of your life (as opposed to term policies that last 5, 10, or perhaps 25 years).
Small sums are often used to cater for funeral costs, but otherwise their use is largely limited to niche applications (e.g. to provide funds to meet any expected Inheritance Tax liability).
Some policies may build up a fund value over time, but this is best viewed as a side effect of their technical structure, rather than a reason for purchase.
There are two key types of whole of life policy :-
- Ones where the premiums are fixed for life, and ones where they can be reviewed by the insurance company.
- Reviewable contracts are often lower cost (and sometimes called Lost Cost Whole of Life), but you are taking a risk. See Technical notes below.
Technical notes for Reviewable contracts – the premium depends upon the policy achieving its investment growth targets, and the Provider’s actuarial experience. If people in general live much longer, and/or long term performance is much worse than expected, your premiums might increase at, typically, the 10th anniversary of the policy, and if you are in ill health, you may not be able to switch to another more competitive provider.
The value of investments can fall as well as rise and you may not get back the amount you originally invested. Past performance is not a guide to future performance.
School and university fee plans
In theory this is a simple problem in financial planning maths.
You can calculate how much you will need to be paying out, and when, and then you simply need to invest sufficient to provide the required sums.
In practice, if you can afford to save in advance, then you can probably afford to pay on a year-by-year basis out of income anyway.
If you can’t afford to save all of the cash needed in advance, then you save what you can and meet the shortfall from ordinary income.
If that isn’t enough, then the final option is to cover the last bit by raising a mortgage (or extending your present one).
As far as savings are concerned, there is rarely any requirement to set up anything specifically for the purpose – most people simply earmark some of their funds for the purpose.
If you do want to engage in specific planning, then your adviser might use a school fees package, but might just as easily use any of the wide selection of financial products and tools available to deliver the right plan for you.
The value of investments can fall as well as rise and you may not get back the amount you originally invested. Past performance is not a guide to future performance. Your property may be repossessed if you do not keep up repayments on your mortgage.
Taxation – Divorce
This article is a very basic overview of divorce and financial settlement.
Divorce is never pleasant, because a relationship that has broken down suddenly turns into disagreements about money – in particular the house and pensions, because in most cases they represent the bulk of the couple’s wealth, and are illiquid.
IMPORTANT – you will save yourself much time and aggravation (and legal fees) if you reach an amicable agreement, which both of your lawyers agree is fair and reasonable.
If you cannot agree, then it will be down to the courts. The courts have wide powers to decide what a fair division of the assets is. In theory they start on a 50/50 split but can take all sorts of factors into account.
Agree on a financial adviser and ask them to conduct a financial analysis of your assets, incomes, pensions etc, and give them the remit of making financially fair (though inevitably painful) suggestions. Hopefully your legal advisers can simply verify the fairness of the suggestions, or at least use the information as an agreed basis on which to do their work in more complex cases (e.g. those involving children).
For example the adviser might raise two equally fair options – one where the wife takes the house, most of the liquid assets, and the husband keeps the pension, the other where the husband’s pension is split, the house is sold and the liquid assets shared. If the husband has a good income and can buy a flat, and wife loves her garden, the first might make sense. On the other hand, if the house is too large for one person, and the wife is worried about retirement prospects, then a house sale with pension split might be the way to go.
As a very broad generalisation there are three types of divorce.
The couple is rich enough for both sides to part and maintain lifestyles, even with an uneven capital settlement. If you fit this category then recognise that going into courtroom battle will be about personal matters more than financial ones. Such personal issues may be justified, but are beyond the scope of this note.
Comfortable / professional couple
Likely to have equity in their own home and, as a couple, have an acceptable lifestyle.
However the financial balance is often one sided, especially with long married couples aged 40+. In particular salary and pension rights often favours one partner over the other, especially if one took time out from their career to look after the children.
In these cases asset and pension assessment is vital because most of the assets will be the house and pensions, and if the house can’t, or shouldn’t, be sold (e.g. there are children whose lives should be disrupted as little as possible) any fair settlement will be a matter of balancing the various assets and pension rights.
Ideally you should ask your financial adviser to look at all the issues and suggest a number of fair options, (all of which will look painful). With good guidance you’ll find that one or more of the options manages to avoid interfering with the pensions (eg the pension-rich spouse lets the other have more of the house/investments). For the sake of simplicity, if you can avoid involving pensions (while retaining fairness), use one of these options.
Asset poor couple
In these cases the pensions may well be the largest asset involved, and it will be impossible to reach a fair settlement without pension sharing/splitting.
The detail of pension sharing/splitting can get very complex, and is beyond the scope of this article. But the general rule is – if your advisers (financial adviser plus each side’s lawyer) can work out something they agree is fair, it’s probably best to go with that advice.
The FCA does not regulate certain tax planning activities and services. Individual legal advice is essential.
Couples who have signed a civil partnership are treated the same as a married couple by HM Revenue & Customs (HMRC).
If you are considering a civil partnership talk to your financial adviser. On the whole, the treatment of the couple within a civil partnership will be more advantageous than that of two single people, but even so there are issues to consider.
In general, if you read or hear about any financial issue that affects married couples, or couples getting married, then it probably applies to you as a couple in a civil partnership.
Key areas are:
Treated as a married couple.
Capital gains tax
Civil partners can pass assets between partners without charge (CGT is incurred when the asset is eventually sold to a third party, with the gain based on the original acquisition cost).
Sale of residence
Married couples are only allowed one principal private residence that can be sold for a tax free gain. If you are considering a civil partnership and each of you currently owns your own home, talk to us. Planning could save you a tax if you sell one of these homes.
Civil partners will be able to inherit from each other without incurring inheritance tax.
Civil partners will be treated as spouses, ex-civil partners as ex-spouses etc. with regard to the taxation of pensions. However this is a classic case of careful wording where what is NOT said is probably more important.
What civil partners normally want is to be treated identically to married couples for the purposes of pension scheme benefits. You should consult your pension scheme administrator and find out what the scheme’s policy is.
Business issues and anti-avoidance
There is a range of rules that apply to married couples to prevent abuse of the tax system, and these will also apply to civil partners.
Most people will not be affected in practice, (because they do not have the kind of financial affairs that give rise to avoidance issues), but if you are a couple considering a civil partnership and you are in business together, or engage in financial deals together, then your civil partner might well become deemed a ‘controlling director’, or ‘associated person’ for the purposes of determining business control and transaction validity.
In particular any requirement for a transaction to be ‘arm’s length’ cannot normally be met by a spouse, and so would not normally be met by a civil partner.
Certain State benefits, although claimed by one person, take the circumstances of the couple into account. If either of you is in receipt of benefits, you should establish what would happen to these benefits if you entered into a civil partnership.
These days, for people of working age, good health is the normal state, and few people consider what would happen if, due to ill health, their career was interrupted or even stopped. For others, the risks are of frailty in old age.
This group of insurances covers all these issues – from getting fast and effective health care, to providing lump sums for more serious problems, to providing income where long-term ill health prevents you working, to providing for the (potentially life savings destroying) cost of old age care.
In short, they are all about maintaining your health and quality of life in adverse circumstances.
- Critical Illness Cover
- Long term care
- Income Protection
- Medical Insurance
In past times, if you were taken ill you recovered and went back to work, or you died and your family received your life assurance (if you had any). Nowadays, modern medicine has increased the survival rate for most illnesses, although they may require a long recovery period, so that many people can find themselves with serious conditions for which a cash lump sum payment is a significant aid to providing support and paying costs during recovery.
To be told by your doctor that you have had a heart attack and that the stress of your work is partly to blame, so stop working or you may die is not, if you have a mortgage to pay and a family to keep, advice that is easy to take.
But, if you have a critical illness policy, you could receive a lump sum payment that will allow you to follow that advice. You can stop working, relax, concentrate on getting better, and not worry about the bills.
How it works
A critical illness policy pays out a lump sum if you find that you have any one of a number of specified conditions or need a particular operation. Payment is normally made on either diagnosis or, if you survive, a pre-determined time period following diagnosis, or progression to some specified level of seriousness, depending on the policy conditions.
For conditions that start off as minor ailments but become more serious, the policy will normally only pay out when certain criteria are met. For example, for a cancer claim the cancer must usually be malignant or invasive.
The conditions covered vary from insurer to insurer, and you should check with the product provider to see exactly which conditions are covered, but these will normally include:
- some forms of cancer
- some forms of heart attack
- some terminal conditions
- others – there will frequently be a long list of other conditions such as kidney failure, Multiple Sclerosis, Motor Neurone Disease, loss of sight, hearing and limbs, and others, the details of which may vary between insurance companies.
One important omission is death
Death may or may not be included in the policy coverage. If excluded it will mean that, while your premium will be lower, there will be no payment if you die in an accident, for example.
The reason for making death cover optional is that many people have sufficient cover from other policies, employers’ schemes etc, and so prefer to use their own money purely for the cover they do need – critical illnesses.
We can help determine what level of cover you need, what sort of policy you need and help find the most suitable and cost effective insurance company to provide the cover.
If you own or control a company and have valuable staff whose absence due to a critical illness would cause a problem, (e.g. the sales manager whose personal touch closes client sales, or the technical specialist whose skills are essential to providing solutions for clients) then as a company you can insure the company against this risk. We will be pleased to discuss this with you.
Income protection (permanent health insurance)
Short of dying, one of the most devastating things that can happen to most people during their normal working life is to become ill or disabled and forced to live on state benefits.
Ask yourself what will happen if you become too ill to work.
- Will you be able to keep up mortgage payments?
- What state benefits will you receive?
- How long will your savings last?
- For how long will your employer pay you?
Good news for employees
Many employee benefit schemes include some income protection as part of their benefits. This is often known as sickness or disability benefit, and if you provide us with a copy of your employee benefit booklet, we will be able to calculate how much cover this offers you.
If you do not have cover through your employer, then you may need to purchase your own.
The cost depends upon a number of factors including your age, how safe or dangerous your employment is, your state of health and how long you are willing to wait before any payment commences. Some people opt for policies that pay out after only four weeks, but others, seeking to cover only the most serious of emergencies, are willing to wait two years.
Most people choose a delay, e.g. of six or twelve months, to accord with resources available and/or employer support for the interim.
When the deferred period is shorter the premiums are likely to be significantly higher.
If cover is required, we will be pleased to provide quotes that suit your needs as part of our overall advisory service.
You can set up an income protection scheme for individual employees, or for employees as a group.
This is a relatively low cost benefit but one that provides great peace of mind for both you and your employees. Few workplace situations are harder for a manager to deal with than telling a liked and respected employee that, because of their illness, they won’t get any more money.
An income protection scheme can remove these worries for both company and employee.
Private medical insurance
These contracts vary from comprehensive plans that will cover you for most eventualities, with all appointments and treatments at times and places of your choice, to popular budget plans that only come into play if the NHS fails to treat you within a given time period (e.g. 6 weeks).
Your employer may offer a scheme that is free or subsidised (although if you do not pay the premium the value of the premium is still a taxable benefit) or you can purchase your own stand-alone policy. The type of coverage – single person or family – and range of benefits and services available will determine the premium cost.
We can help you choose the right plan at the right price for your needs.
Long term care
Long term care in a care home is very expensive, and can quickly erode your savings (including the equity in your property).
It’s a complex area but, if you are a home owner with savings and a reasonable pension, then if you (or your partner) need care (at home or in a care home) it is likely that you will incur significant costs, whilst not getting much, if any, help from the State until your savings have been reduced.
- Residential care costs vary a lot, but basic care (for the infirm with no medical conditions) starts at around £300+ pw, rising as more medical and nursing needs arise.
- If you reside in England or Northern Ireland and have over £23,250 in capital assets, or in Wales and have over £23,750, or in Scotland and have over £25,250, then you are not entitled to financial assistance.
- If you live alone then your house is taken into account and you would be expected to sell it to pay for your care.
- If you have a partner (spouse or civil partnership) then seek advice.
Long term care is a type of insurance designed to provide funds should the person need to go into a care home, typically as a result of old age and its associated problems.
If you are retired, approaching retirement, or would consider yourself to have a potential financial responsibility for an elderly relative, you should talk to your financial adviser about long term care and the options open to you.
There are also product options for those entering care, or who expect to do so.
Immediate Care Products
They are attractive because the problem faced by the individual is that if they live a long time in care, they could exhaust their resources.
These products are not cheap and are a last resort, the main practical purpose of which is for couples to protect the surviving partner from financial worries.
A couple live in a house, which they own. They have modest pensions and perhaps £20,000 in investments. It becomes clear that one of them will need to go into care, but it is also clear that they may live for several years after doing so. The savings would soon be gone. To afford a good care home, the house is sold and soon those savings start to be eroded. The surviving partner could easily spend a lot of their money looking after their partner.
An immediate care product allows for an alternative process.
The house is sold. Some of the money is used to buy the care package, and the rest is divided between savings and the purchase of a replacement home for the survivor – typically a flat. This means that the survivor can face the future on a financially stable basis, without worrying about care fees.
The value of investments can fall as well as rise and you may not get back the amount you originally invested. Tax rules and allowances are not guaranteed and may change in the future.
Mortgage protection insurance
Mortgage payment protection insurance (MPPI) is a type of insurance product designed to ensure that an individual’s mortgage payments are covered in the event that the policyholder is unable to pay.
Most MPPI policies cover unemployment, accidents and sickness and will guarantee payments for a period of 12 to 24 months (although some will be less than that). The amount paid to cover mortgage payments will be a tax-free monthly lump sum. Some policies may also cover other kinds of regular outgoings such as bills.
Policies also tend to have payment limits, so those individuals with high regular mortgage repayments may not be able to cover the whole of their payments.
The waiting period is the amount of time between a claim being made on the policy and the covering payments beginning.
This may also be known as the excess period or deferral period.
Typically, waiting periods for MPPI policies can range anywhere between 30 and 180 days.
If you are entitled to redundancy you may want to choose a longer waiting period in order to secure lower premiums.
Contact us to talk about protection for you and your family.