There are essentially three forms of protection which everybody should consider. They are life insurance, income protection and critical-illness cover.
When thinking about whether or not you need life insurance, ask yourself this question: “If I died tonight, who would miss me and how would they cope financially?”
The answers to these questions will give you a good idea whether or not you need life insurance and if so who the beneficiaries of the policy should be. If you do decide that you need it here are some questions to ask before taking out a policy.
1. How much cover do I actually need (and if I can afford more is it worthwhile)?
Determining the right level of life-insurance cover is about more than just looking at how much you earn (although for working people that’s often a good place to start).
It also involves thinking about all the other bits and pieces you do for which you don’t get paid, but for which you would need to pay someone else if you weren’t around.
This is why life insurance is often just as important for people who do not work (e.g. home makers) as for people who do.
Once you have determined the minimum level of cover you actually need, you then need to decide if you wish to take out a higher level of cover for extra protection in the event of your death, or if you would prefer to use your cash elsewhere.
Of course, it’s always possible to adjust your level of life-insurance cover by taking out a new policy, but if you foresee a change in your needs, then this can potentially be incorporated into the policy to begin with.
For example, if you are taking out the policy to pay off a mortgage in the event of your death, then you can arrange declining cover, which will reduce along with your mortgage.
If, on the other hand, you are looking to protect your children’s’ future and want to guard against the impact of inflation, an increasing level of cover might be appropriate.
3. Do I need cover for the whole of the rest of my life?
If you do then you need a whole life policy. If, however, you only need life insurance until your mortgage is repaid and/or your children have flown the nest, then a term policy may be a better choice.
Term policies only pay out if the policy holder dies within a specific period and therefore tend to offer more affordable premiums than whole life policies.
Any time your circumstances change in any significant way, ask yourself all of these questions again to ensure that you always have the right life insurance policy for your needs.
When thinking about a period without income, possibly the first scenario which springs to mind is that of unemployment. In a case of unemployment however, you can still carry out your everyday tasks (such as housework or childcare) and you are unlikely to need any special adaptations made to your home or lifestyle, other than those dictated by economy.
If, however, you are prevented from working by illness or injury, then your situation may be very much more challenging since you may also be unable to undertake everyday tasks and may even need personal assistance or special equipment.
This is precisely the situation where income protection can prove its value. Typically it pays a monthly income to replace the income you have lost through being unable to work. Income protection is also available to those who do not actually work, but who make a significant non-financial contribution in recognition of the fact that these tasks have value in a very literal sense.
As with most financial products, income protection can be customized according to your personal situation. In addition to looking at the level of cover required, you can adjust the length of time it takes for the policy to take effect (i.e. how long could you reasonably live off your savings) and how long the benefits last.
Critical Illness Cover
This is somewhat similar to income protection but only pays out if the policy holder is diagnosed with one of a range of serious illnesses covered by the policy. While its scope may be narrower than that of income protection, it can be hugely useful for anyone suffering from any of the relevant illnesses.
Like income protection, critical illness cover can also be customized to a certain degree. Policy holders can choose from definitions-based cover or severity-based cover.
In the former the level of pay-out is standardized and applied upon proof of diagnosis of a relevant illness. In the latter the level of pay-out is dependent on the severity of the condition.
As with life insurance the nature of the payout can reflect the needs of the policy holder and their family. For example you could choose to have a level of pay out which decreases over the term of the policy, simply to have the means to pay off a mortgage. You might also choose a policy which will continue to make payments to your beneficiaries should you die while the policy is in force.
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