For the next three articles we'll look at the issue of how to protect yourself and your family from the financial effects of death and illness. These consist of:
• The importance of the quality of your protection policies
• How to get the right level of protection
• A look at the actual claims experience of companies
First of all – the quality of your protection policies.
Protection - the policy conditions minefieldLet's use an example. Dr Cureall, a family man with a large mortgage, has decided it is high time he sorted out his protection requirements.
He wants to know what types of protection there are, and approaches us to ask for advice.
We explain there are 3 types of cover:
•Life protection, paying out a lump sum or income over a certain period of time if you die
•Critical Illness protection, a lump sum paid if you have a specified illness or are totally incapacitated
•Permanent Health Insurance, an income paid to your normal retirement age (or while you are ill) if you cannot work for health reasons
Dr Cureall decides he would like to cover all eventualities (next newsletter explains why this is a good idea). The cover linked to the mortgage will be a reducing benefit (he has a repayment mortgage), whilst the family income benefit will be indexed to take into account of inflation. The aim here is to pay off the mortgage and leave enough for his wife and children to continue their lives without any financial worries.
So let's look at each type of protection:
Life CoverThis is the easiest type of cover to understand. It pays out a lump sum on death and normally the policy to buy is the cheapest one the Cureall`s can find. They may want guaranteed premiums, which means that the insurance company will not increase their future premiums if they are paying out a lot of claims and need to increase their premium to compansate for this. The alternative is reviewable premiums.
Secondly, and crucially, the policies must be written under trust for the beneficiaries. This means any monies will not form part of Mrs Cureall`s estate, and therefore not compound any inheritance tax issue, but still ensuring the Cureall`s will receive their money (potentially saving thousands of pounds of Inheritance Tax).
In our experience, the majority of life assurance policies are not written under trust.
Critical IllnessThis type of protection has become more popular in the last few years, particularly with a view to paying off debt. It is often taken out in conjunction with income protection (PHI).
Since this form of protection is dependant on the number of conditions covered and their wording, there can be a huge difference between companies.
Let's look at a couple of examples:
Heart attacks account for a large percentage of claims. Many companies will insist on there being 'typical chest pain' present for them to pay out amongst other criteria. However, a small proportion of companies do not stipulate this and may be more attractive.
Total Permanent Disability is seen as a 'cover all' if the condition does not fit a specific illness listed in the policy conditions. So if Dr Cureall cannot work then we could assume he'd be covered. Maybe, but not always. Many companies specify in their occupation definitions that the claimant must return to work if they are 'suited' to another job or even worse can perform 'any' type of job. Not very reassuring if you find you have this type of plan as a doctor or dentist. Where possible, you should make sure the plan has an 'own' occupation definition (which may not normally cost you any more money).
Permanent Health InsuranceThis is a crucial part of protection. Whilst thousands of pounds have been paid in claims over the years, you really do need to be aware of the pitfalls:
• Own occupation not specified
• The classification of occupation increases premiums to far higher levels
• Exclusions such as mental illness
• No "waiver of premium" meaning you still pay your premium on receipt of benefit
• Premiums are not guaranteed, meaning they are vulnerable to increases
• A poor choice of deferment periods (when the income starts to pay out)
• No option of indexed protection to protect from the effects of inflation
It is interesting to note that out of the top 14 companies that would be price competitive for the type of cover discussed, we would typically only use 2 because of the quality issues!The Financial Tips Bottom LineIt's likely you have bought one or more protection policies.
We're often surprised at how many doctors and dentists have policies with small print NOT working in their favour. We urge you to check your policy documents and make sure you're not paying for something that may not pay out anyway. Over the life of a policy we're usually talking about thousands of poundsFeature Articles, so don't put it off!
ABOUT THE AUTHOR
Ray Prince is an Independent Financial Planner with Rutherford Wilkinson plc, and helps UK Resident Doctors and Dentists get the best deals on mortgages, protection and investments, as well as helping them achieve their financial objectives. Click here for Financial Advice for UK Doctors and Dentists and to get your free retirement guide, How To Avoid The 7 Most Common Retirement Planning Mistakes. Rutherford Wilkinson plc is authorised and regulated by the Financial Services Authority.
