Many of our new clients already have life insurance policies in place when they first come to see us and naturally assume their family is covered should the worst happen. Unfortunately, when we delve into these policies a little deeper, we often find hidden problems.
A key issue we see is policies that don’t do what our clients think they do. The most common example is people confusing “terminal illness cover” with “critical illness cover”. These sound similar but are used for entirely different purposes.
Terminal illness cover pays out if a doctor certifies someone has less than 12 months to live, whereas critical illness cover pays out if someone is diagnosed with a pre-defined serious illness (such as heart attack, cancer or stroke). Many people who suffer a serious illness will survive longer than a year. If their policy only covers terminal illness, they won’t receive a penny.
Another common issue is people thinking they are covered for the same amount throughout the policy – referred to as “level cover” – while in fact they are covered for less and less each year – known as “decreasing cover”.
Decreasing cover is ideal if the amount you require reduces each year, such as for a repayment mortgage, but not if your requirement doesn’t change, for an interest-only mortgage, for example.
We often see people who have been sucked in by cheap cover via internet comparison sites. These usually ask few (if any) questions and only quote a limited number of providers, often not on a like-for-like basis. This can lead to people taking out unsuitable cover, which might not even be relevant for their circumstances.
A professionally qualified adviser will consider all your circumstances, assess your requirements and evaluate the whole market to find the best product for you.
Another issue we often see is life insurance policies not written under a Trust. A Trust allows the policy – and any eventual payout – to be legally separated from other assets.
This has two key benefits. Firstly, it can enable a faster payout in the event of a claim. Secondly, it reduces the chances of being landed with an Inheritance Tax bill on death. The current Inheritance Tax threshold is £325,000, so someone with £200,000 of life insurance (not written under a Trust) and a £250,000 house would fall well above the threshold. Their family would have to pay 40 per cent tax on the excess.
Thankfully, most problems can be fixed relatively easily with our assistance – providing they are addressed early on.
When we first meet a new client, we always consider protection and insurance before looking at other financial matters. Without adequate cover, it’s both impossible and pointless considering other areas, such as investments and retirement.
It’s also crucial to double-check existing policies and establish what you are and aren’t covered for. If you have any concerns, or are unclear about these details, always consider seeking advice from a professional.