Insurance is expensive – a large portion of your premium goes to meet costs – but you need protection against financial losses you cannot afford.

In this chapter, six things that really matter:

• ˜ Protecting your dependants if you die
• ˜ Facing up to possible incapacity
• ˜ Preparing for possible redundancy
• ˜ Insuring your home...
• ˜ ... and contents
• ˜ Car insurance

Risk management is taking action to prevent possible loss – fitting a burglar alarm is an example. Insurance is the last resort, because of the expense – up to a third of the premium goes to pay the insurer’s costs, such as administration and claim handling.

In addition to avoiding financial disaster there are two other areas where insurance may be necessary: for legal or contractual requirements. Car third-party insurance is required by law. A mortgage lender of over 75-80% of the property value may require mortgage protection insurance.*

Is this you?

• How can I make sure my family are provided for should I die?
• I don’t know what would happen if I had an accident preventing me from working.
• I think I am going to be made redundant.
• Does it matter if my house is under-insured?
• I have indemnity cover on my house contents – what does it mean?
• I damaged my car by backing into a wall – if I claim will I lose my no-claims bonus?

Protecting your dependants if you die

If you are a member of your employer’s pension scheme it may well include a benefit if you die whilst still in service. If not, or if it

is inadequate, consider some form of life assurance.*

Term

This is the cheapest form as it is for a limited period only. An example is a mortgage protection policy, which is for the life of the mortgage only. If it is a repayment mortgage it only need be on a reducing balance basis – as the mortgage is repaid – the cheapest form of all.

A more specialised example is a family income policy which, instead of a lump sum, pays a tax-free income to your dependants for the period covered.

Whole-life

This pays out when you die and so is more expensive. Premiums can stop at retirement. There will always be a cash-in value and the policy can be used as security against a loan.

Endowment

This usually arises in connection with mortgage repayment and it includes life

cover. It is no longer thought to be a good way of saving to pay off a mortgage because of high charges and the risk that there will be a shortfall.

Facing up to possible incapacity

Incapacity to work can arise from sickness or accident. There is help from the state, but is it enough?

Sick pay

If you are employed, your employer pays you statutory sick pay, but it only continues for six months and the maximum at the time of going to press is only £62.20 a week.

Incapacity benefit

There is a state benefit for incapacity, tax free, but a medical check is required.

It is not payable if you are in receipt of statutory sick pay or if you are capable of doing any work, i.e. not only your former job.

Housing costs

The state gives help with mortgage interest payments and certain other housing costs if you are out of work, but you must be eligible for Income Support, which means a low income and savings of less than £8,000.

Sickness insurance

Your employer might give cover at a higher level than the maximum and/or for a longer period. If not, consider insurance. Your trade union might have a policy. Another source is a friendly society.

Insurance is available to cover sickness, incapacity and unemployment together and this might be more appropriate for you.

Credit insurance

This covers the risk of not being able to pay the interest on a loan (such as a mortgage, when it is called a mortgage protection policy) in the event of loss of income due to disability, illness or redundancy as well as death. It is expensive, but unless you have savings you should consider it.

It is not available to self-employed people and there can be difficulties in connection with redundancy. Check the wording and find out whether pre-existing health problems are covered.

Permanent health insurance

This covers permanent incapacity, which may be more important to you than life cover (you are 14 times more likely to be off work for more than six months than you are to die before 65). Employers sometimes provide cover for senior staff.

Critical illness insurance

This pays a lump sum if you contract one of a specified list of potentially terminal illnesses, such as cancer. But a combination of life cover and permanent health may be better, as the cover is wider.*