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Cover all options

Nia Williams

September 1, 2008

Accident, sickness and unemployment protection

Payment protection insurance is insurance that will pay out a sum of money to help your client cover their monthly repayments on mortgages, loans, credit/store cards or other payments if they are unable to work. This could be because they have an accident or sickness, or become unemployed through no fault of their own. It is sometimes known as ASU (accident, sickness and unemployment) insurance, Account Cover or Payment Cover.

PPI can provide worthwhile cover against unexpected changes in your client’s personal circumstances, but bear in mind it does have limitations and exclusions. It is useful, but your client may not always want it or be able to claim on it when you need to.

Things to bear in mind:

· PPI only pays out for a set period of time, generally either 12 or 24 months.

· To claim on the unemployment part of the policy typically your client must have been employed continuously by the same company for the last 12 months on a permanent contract.

· Check carefully if your client is self employed and requires cover – the policy may not cover them.

· Your client may not be able to make a claim for an illness they already have or have had before. Make sure you check this before they take out the policy. This will be called a pre-existing medical condition and can include any medical conditions they have – or have had.

· Stress or back complaints, and possibly other conditions, may not be covered, even if your client can’t work because of them. Again, it’s worth checking before you recommend the policy.

· Find out whether the policy is a single or regular premium. If your client buys a single premium policy they pay a lump sum of 3-5 years’ worth of premiums in advance. This amount is added to the sum they borrow and attracts interest, so they’ll be paying more over the long run.

This example shows how much more a single premium may cost.

Loan £2,000

Loan interest 200

Total loan cost £2,200

PPI premium £250

PPI interest 30

Total PPI price £280

Total cost of loan with PPI £2,480

Total cost of loan without PPI £2,200

· Also, think about what your client would do when the claims payments stop and they are still unable to work.

· Like all insurance, PPI policies will generally include a number of exclusions or conditions that will prevent your client from claiming on the policy.

Mortgage payment protection

MPPI, or mortgage payment protection insurance, is private insurance that borrowers may take out to insure their mortgage repayments against sudden loss of income due to unemployment or health-related difficulties.

State benefits do not normally cover mortgage interest during the first nine months people are out of work. However, you do need to be sure the insurance cover is suitable for your client and their circumstances – especially if they are self-employed, on a fixed term contract, or have a pre-existing medical condition.

To keep the cost of the insurance down, there are some periods where your client will not be covered (you should check the individual policy for exact details). The main ones are an “exclusion period” of up to 60 days when they first take out the policy, during which any claim for unemployment would not be met (although claims for accident or sickness would be paid). In addition, there is an “excess” or “waiting” period of up to 60 days for each claim, during which no payments will be made.

There are some circumstances when MPPI will not cover your clients – for example, unemployment caused by misconduct, or that they knew was impending at the time they took out the insurance.

Most people should consider taking out full MPPI, covering the full amount of the mortgage payments following accident, sickness or unemployment, but if your client already has other cover -such as accident or sickness cover from your employer, Income Protection or Critical Illness insurance, or substantial levels of savings – they may not need the full level of MPPI insurance. If so, they may “top up” their existing cover (perhaps by taking out the unemployment-only element of MPPI), or they may decide that you do not wish to take out MPPI at all.

Critical illness cover

Critical illness cover (CIC) pays out a lump sum if your client is diagnosed with certain illnesses. The illnesses covered will be specified in the policy along with any exclusions – these differ between insurers. CIC policies usually only pay out once, so are not a replacement for income.

Before you recommend this cover, there are some things to consider:

· Critical illness cover pays out a lump sum if your client is diagnosed as suffering from one of the specified illnesses.

· Policy summaries will often set out a list of illnesses covered, but this is only a guide and full details will be in the policy document. This will also set out the criteria that have to be met before the insurer will pay a claim.

· As an example, in the case of cancer, not all cancers or stages of cancer are covered. And for heart attacks, the insurer will need to have medical evidence of the severity of the condition before paying a claim.

· CIC does not cover simply any sickness that affects your client’s ability to work – it is specific about which illnesses are covered.

· Some insurers exclude all pre–existing conditions but others will decide on the basis of your client’s personal medical history.

· It’s essential that your client gives full, honest answers to questions they are asked about both their own and family medical history. Giving incomplete or wrong information could invalidate their policy and any claim they make on it.

· Make sure you understand what the policy covers, when it will pay out and when it will not.

Income protection

If your client is an employee and they fall ill, their employer might pay them their full pay for a few weeks or months. By law, an employer must pay most employees statutory sick pay for up to 28 weeks, though this will probably be a lot less than their full earnings. After that, they would probably have to rely on state benefits.

If your client can’t work because of illness or disability, income protection insurance (also called permanent health insurance) pays out a tax-free income.

Example of working out how much cover your client needs:

Sue is single and earns £26,000 a year before tax and other deductions. She estimates that, if she was ill for a long time, her budget would be affected as shown in the table below.

Sue’s budget calculations in the event that she couldn’t work Her estimates

Income she would loseHer take-home pay £18,000

Deduct income she would gainApproximate long-term incapacity benefit £4,000

Deduct expenses Sue would saveWork-related costs, mortgage interest payments if covered by mortgage payment protection insurance £3,000

Add extra expenses she would payAllowance for, say, cost of special equipment or treatment, cost of heating her home for more time £2,000

EXTRA INCOME NEEDED £13,000

Sue reckons she would need around £13,000 a year to maintain her lifestyle. This is half her before-tax pay of £26,000.

Sue also works out that as a perk of her job, her employer will pay her half a salary for 52 weeks after the statutory sick pay period of 28 weeks. She therefore arranges for her policy to pay out after 80 weeks of incapacity.

Life insurance

Life insurance is about providing some financial security for people who depend on your client if they died. (So if they don’t have a partner, spouse or civil partner, children, or other dependants, they may not need life cover.)

There are two main types of life insurance: term insurance and whole-of-life insurance.

Term insurance (also called term assurance) pays out only if your client dies within a certain term, and whole-of-life insurance pays out whenever they die. Some whole-of-life policies also contain an investment element to them, but such investment-type policies cost a lot more than protection-only insurance.

Term insurance is the simplest and cheapest type of life insurance, and is known as term insurance because your client can choose how long they’re covered for, say, 10, 15, or 20 years (the term).

Term insurance only pays out if they die within the term they’ve agreed. If they live longer than the term, they get nothing. As a couple, your clients can also take out term cover in both their names, with the policy paying out if either of them die during the term.

Whole-of-life insurance pays out an agreed sum when your client dies, whenever that is. These policies will cost your client more, partly because they will pay out whenever the event (death) happens, but also because of the various charges that come with them. The cost also depends on your client’s lifestyle: if they’re a smoker and do a dangerous job, they’ll pay more than a non-smoking office worker. Life cover also costs more for men because, on average, they don’t live as long as women. Always compare what’s covered by a policy, not just the price. Some might be cheaper than others, but they may not offer the same level of protection.


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