Life, Critical Illness and Income Protection Insurance: The Basics

Insurance protects you from the worst

By Joe Thornhill
Updated: 07:05 ET, May 23, 2011

Insurance against the consequences of death or critical illness may seem like an unnecessary expense, especially when budgets are under severe strain.

But the cover can prove invaluable, says Jeff Prestridge and Joe Thornhill.

My insurance proved necessary

The past three years have been a living nightmare for Donna Morgan. Not only did she have to come to terms with the fact that she had multiple sclerosis, she also lost her partner, Davey Purvis, to leukemia at the age of 40.

“It’s been 21 months since Davey died,” says Donna, a 39-year-old nursery nurse. ‘I miss him so much. Within five months of being diagnosed with cancer, he was dead. The only solace is that whenever I look at our five-year-old son, Jack, I’m reminded of him.

Although Donna is often up at night and can’t believe what happened to her and her family, one comfort is that she doesn’t have to worry about money.

She heeded the advice of a financial advisor for ten years when she was buying her first property and bought protection insurance to protect her finances in the event of a serious illness, so money is not an issue.

The mortgage on her three-bedroom house in Edinburgh was paid off from the proceeds of the critical illness (critical illness) policy and also from Davy’s critical illness and life policy in 2008.

Donna has also been able to use some of the money to live while she deals with her grief over the loss of Davey and her debilitating MS. She hopes to be back at work soon, after a year off due to illness.

Money can’t stop the grief, but it did take away the financial stress at a difficult time in my life. Without the financial protection the policies afforded, I’m not sure how I could have handled it.

Unfortunately, Donna’s shrewdness in buying financial protection is rare. “People often overlook the benefits of protection insurance because they think the worst will never happen to them,” says Alan Lucky of Highclere Financial Services in Hemel Hempstead, Hertfordshire.

But in my opinion, people go without a protective cover at their own peril. Those who invite say it is a godsend and say they are so relieved that they took out the insurance.

It’s concerning, Lucky says, that many families are now canceling coverage in response to pressure on family budgets from recent tax hikes and the poor state of the economy.

“Since the recession took hold three years ago, I’ve seen protectionist demise rates go from 2% annually to 8%,” he says. I haven’t seen such high policy reversals since the early 1990s when the housing market crashed and the economy stalled.

People say they can no longer afford the cover. While I think it’s a shortsighted reaction at times, it’s understandable given the pressure of so many home belts. There are three main types of protective cover.

The protection you need

cover life

This is the most common and straightforward. Usually, it is sold as term insurance, which means that the insurance company agrees to pay an agreed-upon lump sum if the policyholder dies during the term of the policy.

They are usually sold at the same time the mortgage is taken out with enough cover to pay off anything owed on the mortgage. Coverage is inexpensive and over 99% of claims are honored.

The cover can be set up on an individual or shared basis. So, £100,000 life cover over 20 years for a 35-year-old non-smoker would currently cost £7.46 per month from the insurer Bright Gray. Equivalent cover for a married couple, both aged 35 and non-smoking, costs £11.46 Bright Gray – with demise on first death covered.

One form of life cover is the Family Income Benefit (FIB) where a regular income is paid until the expiry of the policy term rather than a lump sum payment. So, for example, a 20-year FIB policy paying an annuity (tax-free) of £20,000 set up by a 35-year-old man costs Scottish Provident £12.47 a month. A joint policy, with cover cessation at first death, will cost £18.16 per month Scottish Provident.

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Serious illness

This pays a tax-free lump sum when a serious illness, such as cancer or a heart attack, is diagnosed. There are 690,000 individual policies in force for critical illness compared to 3.1 million policies for life.

“Life cover is much better known than critical illness, so people buy life cover unless they have someone to tell them differently,” says Matt Morris of life search.

A £100,000 20-year critical illness policy for a 35-year-old non-smoker – with life cover – would cost £30.78 a month (guaranteed premiums) from Ageas. Shared cover will cost £57 per month from Aviva. The reluctance of some insurance companies to pay claims in the past has not helped policy sales, but most companies have reformed their methods now.

Provided that new clients disclose any prior medical problems in their claims, no matter how trivial, any subsequent claim is likely to be honored, provided the illness is serious.

›/2015 CreteCal’s disease cover: an essential guide

Income protection

This is the most expensive type of coverage because it provides an income rather than a lump sum. Payments continue as long as the policyholder is unable to work (due to a serious illness) or reaches the normal retirement age.

A 35-year-old white collar worker needing £20,000 annual cover would pay £49.19 per month with Unum insurer. Cover will end at age 65. The equivalent cover for a 35-year-old female would cost £82.27 from Ageas.

›10,000 Compare the cost of income protection policies

How does protection cover start?

Donna Morgan has benefited from two policies. The first was a critical illness policy with Bubba, and the second a joint life and critical illness policy that Davey had taken while working as a garage attendant at Edinburgh Airport.

When Donna is diagnosed with MS, Bubba pays her £90,000. It meant that when Davy became unable to work, she could clear the mortgage, making sure they kept their house.

Davey’s life and critical illness cover with Bright Gray paid £45,000 for a diagnosis of leukemia. She then paid a further £190,000 to his dependents upon death. Since Davey had a daughter from a previous relationship, this lump sum was split between her and Donna.

As part of the Bright Gray cover, policyholders are assigned, if they wish, a Support Nurse who can provide assistance and advice over the phone. Bright Gray employs nurses from Red Arc, an independent care advisory service. Since Davey was in the hospital most of the time after his diagnosis, Donna turned to Red Ark for support.

“The nurse was amazing,” she says. She called me regularly to provide support and answer any questions I had about Davey’s treatment.

She helped me find out what kind of leukemia Davy had, since I knew nothing about the disease. Sue was also able to provide counseling to help my son Jack, as he was experiencing emotional difficulties at the time. Red Arc also funded seven grief counseling sessions after Davey’s death. “Really, I don’t know how I would have died without the insurance cover. I appeal to young people, especially newlyweds and families, to view it as an essential part of family finances.

Paying for protection pays off

As a financial advisor, Greg Jenkins is expected to practice what he preaches to his clients. He saves regularly and has protection insurance in case of a serious illness.

Greg, a partner in an Edinburgh financial firm, was grateful for his planning when he drove home from work in March last year. The mountaineer had an epileptic seizure, and he is only 31 years old. After extensive testing, it was discovered that he had a low-grade glioma – a benign tumor in the right frontal lobe of his brain. This was removed last October.

Greg is now on anti-seizure medication and is not allowed to drive for at least another five months. He also had to give up his passion for diving.

But he is grateful for the payments he received from two Zurich Life critical illness plans implemented in 2005 and 2008, the latter with combined life coverage. In total, he earned £127,000. This meant that he was able to reduce the mortgage on his two-bedroom flat in Bathgate, West Lothian, and invest some of the proceeds.

“I thought I was the last person who needed to claim,” he says. I was young and energetic – but how wrong I was. In some ways, my life has improved because I now have no money worries. Since 2007, Zurich has paid £2.4 million to 34 clients with brain tumors.

Greg is now determined to climb, or “bag”, all 283 of the Munros in Scotland over 3,000 feet. So far, he’s got 47 bags and managed to convince his girlfriend, Parisa Ghanbari, a 30-year-old GP, to join him. He also plans to run the Loch Ness Marathon in October, raising money for Cancer Research International. Visit: justgiving.com/gregory-jenkins0.

How income protection can prove to be worth it

Accident sickness and unemployment insurance (ASU) covers loss of income, usually for only one year. Although only short-term, it can provide an invaluable safety net as Diane Fletcher has found.

Diane, 57, of Llandudno, Conwy, was laid off from her job as District Manager for the Housing Association last January. This is the first time in her career that Diane, who is married to Alec, 59, is out of a job.

The couple is upset that Diane has been the main earner. Since Alec suffered a heart attack in 2003, he has been working at a recycling plant for minimum wage. He used to be a tavern owner.

Diane had taken out an ASU policy in 2007 with British Insurance paying a monthly premium of £20. She claimed in January — after a three-month deferral period — and the policy started paying out last month. Diane will be paid £650 a month for 12 months unless she finds work.

“I bless the fact that I showed an uncharacteristic amount of insight and got the politics out,” she says. I am so thankful for that now. It relieves a bit of stress while looking for a job.