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Personal Protection Insurance: What you need to know

Insurance policies that protect the less tangible but essential parts of your life – such as income or mortgage – can provide an invaluable safety net should the worst strike, whether that’s serious illness, unemployment or even death.

Since the arrival of the Covid-19 pandemic more and more people recognise the need for safeguards against sickness and job instability, and as a result personal protection insurance has become increasingly popular. But which policy is right for you?

Term Life Insurance

This is a policy that offers coverage for a set period of your choosing, whether that’s one year or several decades. If you die during this term then the policy will pay a lump sum to your dependents. The cost of premiums is linked to factors such as age, health and the length of the term, and it’s possible to set up a joint policy with a partner. There are several types of term life insurance available:

Decreasing Term Life Insurance

Your level of coverage lessens as the term of the policy progresses, reducing the payout. It’s good for covering debts such as a repayment mortgage as the balance of the latter reduces over time.

Level Term Life Insurance

The level of coverage is fixed, so the payout remains the same regardless of when you die within the term.

Why buy Term Life Insurance?

  • These policies tend to be cheaper than whole life insurance, so it’s a good way to ensure long-term coverage at an affordable rate.
  • It offers flexibility as you can choose the length of time you want coverage for.

Whole Life Insurance

This is a life insurance policy that only ends when you die – unlike term life insurance which runs for a fixed period. Once you die your loved ones will receive a lump sum payout. It’s a more expensive form of life insurance, but premiums will depend on factors such as level of coverage, health, age and lifestyle. You can get joint or single policies. The main types of whole life insurance include:

Balanced Cover

Your premiums are the same throughout the policy, with a fixed cash payout when you die.

Maximum Cover

Your premiums are likely to increase with age as your insurer needs to review the risk associated with coverage.

Why buy Whole Life Insurance?

  • It does not expire until you die and your family are guaranteed a payout.
  • It can help your family deal with a potential UK inheritance tax liability.
  • If the policy is written in trust your beneficiaries are not put in a difficult position of having to settle the tax before the estate assets are released.

Critical Illness Cover

This is a type of insurance that provides a lump sum payout if you are diagnosed with or undergo surgery for a specified critical illness (as long as you survive for a certain period afterwards – typically 10-14 days). It can help minimise the financial impact of serious illness by helping with things like the cost of treatment, household and childcare costs and a loss of income if you take time off work to recover. Children’s critical illness cover can also be included.

Policies come in fixed terms, the length of which can be based on how long you’ll have demands on your income, such as a mortgage. Like term life insurance you can opt for level cover – where there is fixed lump sum payout and fixed premiums – or decreasing cover where the value of your cover decreases each month.

Why buy Critical Illness Cover?

  • A safety net if you depend on your salary to support yourself and/or your family.
  • If you don’t have substantial savings to fall back on, should you become seriously ill.

Income Protection Insurance

This type of insurance offers financial support should you lose income because you’re unable to work due to sickness or an accident. It ensures you get regular payments to replace part of your income, until you can return to work or you retire.

A policy covers a set term, and when a claim is made there is usually a waiting (deferral) period before payments start – between four weeks to a year. The longer the deferral period you choose, the lower your monthly premiums will be.

The cost of insurance premiums is also affected by age, health and medical history, occupation, the percentage of income you want covered and the illnesses/conditions covered.

Premiums can come in the form of standard premiums, which can increase over time, or a guaranteed premium which remains fixed for the term of the policy.

Why buy Income Protection Insurance?

  • Most employers will not support staff if they are off sick for more than a year. Income protection insurance offers a safety net in case of long-term illness.
  • It’s also useful for self-employed people who have no sick pay.

Mortgage Protection Insurance

Mortgage payments are one of the biggest outgoings for many people, so it’s important to put a plan in place if you lose your source of income.

Should you become unemployed or unable to work due to sickness or an accident then this type of policy will cover the cost of your mortgage payments each month. You can also find policies pay out 125% of your mortgage so you can cover other household costs too. Most policies will offer payouts for up to two years, but some offer less.

The payments are usually triggered after there’s a set period of unemployment – generally 30-60 days – after which you’ll receive a set monthly payment. You can purchase ‘back-to-day-one’ policies that cover you from the date of unemployment, although these will be more expensive. Premiums are based on age, income, job and mortgage repayments. You can find mortgage protection policies for accident and sickness, unemployment or combined. Mortgage protection policies may not cover pre-existing health conditions.

Why buy Mortgage Protection Insurance?

  • If in the event of losing your job or being unable to work due to sickness you do not have the financial resources to cover your mortgage repayments.
  • If you are self-employed and thus not eligible for sick pay or redundancy.

Gift Inter Vivos

This is an insurance policy that covers liability for inheritance tax when one person makes a gift to another person during their lifetime.

Large gifts can be considered potentially exempt from IHT if the giver survives seven years after making them.

A gift inter vivos policy protects against this possibility by covering any tax bill due should you die within seven years of making the gift.

Why buy a Gift Inter Vivos Policy?

  • You’re looking to reduce the size of your estate to avoid IHT and want to ensure any gifts remain free of UK Inheritance Tax.
  • The gift you want to give is large and any UK IHT due should you die within the seven-year period would be financially onerous for the recipient to pay.

Moving abroad may affect your life insurance cover. We therefore strongly recommend that you inform your life insurance provider about your plans to move abroad to ensure continuity of cover remains in place.

Talk to Us

Speak directly to a financial adviser about your insurance protection requirements as an expat abroad.

Please contact us on Tel: +44 207 998 0570 or email enquiries@fwm.gi