How's your safety net?
Millions of families in Britain are walking a financial tightrope with no safety net if one or both parents are unable to work because of a serious illness.
A study undertaken by insurance company Legal & General shows that more than a third of parents have not even discussed this possibility.
A fifth of households in the UK are at least covered by life insurance, which pays a lump sum if one or both parents die. But of the 1.5 million people who bought life insurance last year, only a third bought its ‘buddy’ product – critical illness cover, which includes conditions such as cancer, a heart attack or a stroke.
Official statistics show that nearly 109,000 people die each year between 25 and 70, the ages when life insurance is most likely to be bought. But every year, three times this number are diagnosed with cancer, which can strike at any age.
More than one in three will have cancer, according to Cancer Research UK. Around 103,000 a year suffer heart attacks, according to the British Heart Foundation, and 150,000 are victims of a stroke.
Tom Baigrie, chief executive of adviser company LifeSearch, which specialises in what is known as ‘protection insurance’, says: ‘Many people buy life insurance because it is cheap, which is a good start.
‘However, on average we are all living longer and suffering a serious illness or not being able to work is much more likely than dying before retirement. Anyone with a family and debts should consider critical illness cover.’
This type of policy is often sold in tandem with life insurance. A combined life and critical illness deal might cost around £80 a month for a 45-year-old in good health. A policyholder could expect 25 years of cover and a £100,000 tax-free payout if a claim was made in that time. Younger buyers would pay less.
One woman who has benefited from critical illness cover is Michelle Wilson, from Nottingham. The married 43-year-old was diagnosed with breast cancer and began treatment in July. Michelle, who has a son Nathan, 11, took out the policy a while ago and had forgotten about the £52 monthly cost.
She said: ‘Having the extra money doesn’t change my illness, but with a year of treatment ahead it means I don’t have to worry about the mortgage.’
Critical illness insurance has remained unpopular in recent years, in part because of scepticism over claims being paid out.
Adviser Alan Lakey, of Highclere Financial Services based in Hemel Hempstead, says these assumptions also often boil down to confusion over acronyms. ‘We use a lot of shortcut words – such as PPI for payment protection insurance – and it’s no surprise that consumers lump them all together,’ he says.
Statistics from trade body the Association of British Insurers show that 92 per cent of all critical illness claims were paid out last year. This was worth more than £914 million to families who needed help, with the average payout more than £60,000.
FOUR WAYS TO PROTECT YOU AND YOUR FAMILY
There are a number of different types of protection insurance, which can be bought individually or together. For each type, customers pay a monthly sum, or a ‘premium’.
1) LIFE INSURANCE: The cheapest type of cover, which pays a tax-free lump sum to relatives if the policyholder dies. It can last either for a set term – such as the life of a mortgage – or for as long as the policyholder lives, known as whole of life insurance. The latter is more expensive.
2) CRITICAL ILLNESS COVER: This pays a tax-free cash lump sum if a policyholder is diagnosed with a serious condition listed on the policy.
3) INCOME PROTECTION: A percentage of an earner’s normal monthly income – typically between 50 and 70 per cent – is paid each month for a set period, covering any time in which someone is ill or injured and cannot work. It can be valid over a long period – up until retirement, for example – or for a shorter term.
4) FAMILY INCOME BENEFIT: This pays a regular tax-free monthly income to family members if a parent dies, rather than a lump sum as with traditional life insurance.
BUY WITH ADVICE
An adviser can do all the hard work searching for a suitable policy at the right price and explain any likely exclusions or surprise inclusions – such as ‘child benefit’, which is free, and pays a lump sum to a policyholder if a child is diagnosed with a critical illness.