Protection – The Basics

In short – this is a form of insurance that provides financial cover for you and or your dependents if your circumstances change or you die.
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What is Protection?

In short – this is a form of insurance that provides financial cover for you and or your dependents if your circumstances change or you die.

In 2018, the FCA’s Financial Lives Survey found that 65% of UK adults had no life insurance or other financial protection.  Of those that had cover, life insurance was the most common, however only 10% had critical illness cover.

The Protection Gap

Swiss Re has calculated a life insurance protection gap, which equates to ‘the shortfall in the amount of cover necessary to maintain the current living standards of dependents.’ Its formula for calculating the protection gap is broadly:

Resources needed – cover in place through individual policies and through employer-sponsored group life cover = protection gap.

The figure produced represents the amount of life cover which should be in place, based on national average salaries.  Deducted from this figure is any cover in force to find a level of protection shortfall.

According to Swiss Re, the UK life protection gap calculated on this basis is currently estimated to be £2.4trn.

Types of Protection Cover

There are many different types of insurance products available and it can be confusing.  Here is a brief list of them:

  • Life assurance (LA)
  • Income protection insurance (IP)
  • Critical illness Cover (CIC)
  • Long Term care Insurance (LTCI)
  • Payment Protection Insurance (PPI)
  • Personal accident and sickness insurance (PAS)
  • Accident, Sickness and unemployment insurance (ASU)
  • Private Medical Insurance (PMI)
  • Health cash Plans

For the purposes of this blog we summarise the first three on this list:

Life Insurance (LI)/ Life Assurance (LA)

Effectively this provides a lump sum on death of the life assured.

This would provide financial support to your dependents.  It may be used in the first instance to ensure that your debts will be paid off if you die unexpectedly.   If debts are left it could result in assets being lost and not passed on to those who you specified.

The main types of policy are Whole of Life and Term Assurance and as the names suggest, whole of life assurance covers the life span of an individual whereas term assurance covers a specific term.

Invariably a whole of life policy will be more expensive than a term assurance policy. There are a number of different categories within each type.  The intricacies should always be considered and discussed in greater detail with a financial advisor after careful consideration of your personal circumstances.

Income Protection (IP)

IP typically, is a long-term policy that pays out a regular income when the insured becomes unable to work because of a long–term illness or incapacity.  The statistics show that an individual of working age is significantly more likely to be off work as a result of illness or incapacity than they are to die, highlighting that IP or Critical Illness (as detailed below) is insurance that should be consider along-side Life Insurance or Life Assurance.

Here are some questions to ask yourself.  If you answer ‘no’ then perhaps you should consider some form of income protection.

  • Could I get by on sick pay? – If you are employed it’s worth checking this in your employee benefits package.
  • Could I survive on Government benefits?
  • Do I have enough savings to see me through a long period?
  • Am I in a position to take early retirement?
  • Would my partner or family be able to support me?
Critical Illness Cover (CIC)

CIC will support you if you’re diagnosed with a specific type of serious illness.  You will receive a lump sum payment to help cover the costs of treatment and to help pay the bills if you are not able to work.

What do I have to do?

You may wish to speak to a professional to help sort out your insurance – there are so many products available and it can be confusing to navigate your way through them all by yourself.

It should be noted that it is essential that you tell the insurance/ financial advisor everything and answer all their questions honestly.  If you fail to do so it could result in the insurer not paying out.

If you are not sure about something – it’s best to be careful and discuss it with the insurer or financial advisor

For some further reading check out the Money Advice Service and here is a link to a useful document that they produced explaining some of the types of protection available.