Shopping for a safety net throws up all shapes and sizes

Never before has there been so much choice for those looking to buy “rainy day” insurance, which provides a financial safety net for life’s unfortunate events, such as death, disability or unemployment.

The policies are not only available from brokers and direct from insurers, but supermarkets and price comparison websites have also piled into the market in recent years putting price firmly in the spotlight.

Premiums for protection policies can vary significantly, depending on a wide range of factors such as the individual’s smoking and drinking habits, fitness, medical history, salary and occupation, as well as age and gender.

Finding the policy that is right for you should not just be about price, however. It needs to be suitable for your individual needs and circumstances.

Life insurance

Life insurance is a way of making financial provision for dependants or other designated beneficiaries after you die.

There are two types of life insurance: whole-of-life and term. A whole-of-life policy pays out on the death of a policyholder, whenever that may be, while term policies will only pay out if the policyholder dies within a set period, typically 20-30 years. Whole-of-life plans have an investment element which means that the amount paid on death cannot be guaranteed. This is unlike term insurance policies, which pay out a guaranteed sum that is agreed upfront.

Term insurance policies are far more popular as they are cheaper than whole-
of-life.

Pros: Pays out a tax-free lump sum that can pass to a spouse free of IHT. Some policies, such as decreasing term assurance, will allow you to reduce your premiums as the years run down on the policy. Premiums can also be guaranteed.

Cons: Of little use to single people who do not have dependants or beneficiaries. Those aged 75 or over may find it harder to obtain cover with insurers applying age cut-offs.

If you like high-risk sports, such as climbing or motor sports, your premiums will cost more. If you outlive your term assurance policy, your beneficiaries will not receive any payout when you die. This cover needs to be compared with death-in-service benefits offered by an employer, which can be as high as three or four times salary.

Critical illness

This cover pays out a tax-free lump sum on the diagnosis of a range of illnesses which have a severe impact on lifestyle.

Heart attack, stroke and cancer are the core conditions but others include Alzheimer’s disease and loss of limbs.

Only illnesses or disabilities that are listed in the policies can be claimed on, with most insurers listing at least 23 conditions. This type of insurance can be bought on its own but is often sold with whole-of-life, endowment or term insurance. It is not a replacement for income as it only pays out once.

Pros: The benefit is paid on diagnosis rather than death so the policyholder can spend the payout as they wish. Critical illness insurance has had a poor reputation in the past for denying claims due to non-disclosure by the policyholder, but payout rates are improving. Some policies will now pay a proportion of the claim based on the severity of the condition.

Cons: Critical illness policies have an “all or nothing” approach to claims which must meet strict policy definitions. Cancer is the most common claim, but only the most advanced diagnoses are likely to receive a payout. Not all insurers will offer policyholders a discount on their premiums if an exclusion is placed on a pre-existing condition, such as cancer.

Critical illness policies can also vary greatly in the number of conditions they will cover. For example, the policies won’t pay out for backache or stress, the most common reasons for being off work.

Payment Protection Insurance (PPI)

PPI is often bought when taking out a personal loan, credit card or mortgage. The cover is designed to help meet repayments of these loans if you are unable to work because of accident, sickness or forced unemployment, with benefits usually paying out for 12-24 months. Premiums are based on an agreed level of monthly benefit but
the maximum monthly benefit is about £1,500 per month.

Pros: This type of cover is often less expensive than income protection if it is bought as a regular premium policy.

Cons: Payouts are typically limited to 12 to 24 months. Premiums and contracts are reviewed annually so premiums can rise or cover be reduced or withdrawn. The policies have many exclusions and most won’t cover for conditions such as back pain or stress. If you’re on a short-term contract, or self-employed, you may not be covered for any redundancy claim.

Income Protection (IP)

This is a long-term policy that will pay a regular income if you cannot work owing to illness, accident or disability. The benefit is typically 50-65 per cent of gross monthly salary. Premiums are calculated based on age, occupation, health, amount or level of cover and the selected retirement age or deferral period. Different insurance companies offer different definitions of incapacity. Your policy may not pay if you are able to do a job other than your usual occupation.

Pros: The benefit will cover a high proportion of the lost salary as it is paid tax free. Unlike PPI, which is a short- term insurance, income protection will keep paying benefits until retirement or until the policyholder returns to work. Some “budget” income protection policies will pay out for shorter periods and consequently have lower premiums.

Cons: It is more expensive than PPI. These policies are also not as simple to buy as the insurer will ask more questions upfront about medical history with many requiring a GP’s report.

Most policies will restrict benefits if you are still able to do some kind of work, albeit not your previous occupation. It doesn’t include redundancy cover, which can be bolted on to the policies for extra cost.

Private Medical
Insurance (PMI)

With its benefits of private hospital rooms with en
suite bathrooms and rapid access to consultations and treatments, PMI is often viewed as a luxury insurance. But in spite of big improvements to the NHS waiting targets, the ability to jump queues for treatment is still a key attraction of this cover.

Policies are built around desired levels of outpatient and inpatient treatment.

Pros: The NHS has met its 18-week waiting target for treatment after a GP referral but PMI will get you seen much faster than
this and at a time and place of your choosing. Some policies will cover children for free.

Policies are flexible and can be built to suit budgets from basic cover to “Rolls- Royce” or comprehensive cover. Most insurers will offer ways to lower your annual premiums.

Cons: Emergency treatment is not covered. Outpatient and inpatient benefits are not unlimited.

If you are fit and healthy and not likely to claim on your policy, then you are less likely to get a return on your premiums.

Overpaying for cover you are not likely to use, or can’t use – because of an exclusion for a pre-existing medical condition – is not uncommon. Cosmetic treatments are not covered.