The best way to ensure that the proceeds
of a life policy are paid to the people
you intend to benefit is usually to arrange
for the policy to be in a trust. The most
appropriate type of trust is generally one
that gives the trustees discretion or flexibility
about how they distribute the benefits, but
it’s a good idea to get advice about this.
If you die, the policy proceeds will be paid
to the trustees and then the beneficiaries not into your estate.
This arrangement should save inheritance
tax and speed up the payment to the
beneficiaries.
By contrast, the purpose of health
insurance is to provide some money if
you fall seriously ill or have an accident,
potentially affecting you for many years. In
this case, you would probably stop earning
although your financial needs might well
be greater than ever. The state benefits
you would receive would be relatively low
and unlikely to provide sufficient income
to meet your needs, especially if you have
substantial rent or mortgage payments
to make. You might also need capital,
for example to make adaptations to your
home or to pay off loans or other liabilities.
Virtually everyone who is working needs
some kind of health insurance to provide
financial protection if their earnings are
affected by serious illness or disability.
Even if you have no financial dependants,
there’s a very strong chance that you will
need health insurance.
Income protection – sometimes called
permanent health insurance – pays a
weekly or monthly income if you cannot
work because of illness or disability. You
may think you don’t need to worry about
this kind of cover, but the fact is that, in
the UK, there are over 11 million people
with a limiting long term illness, impairment
or disability and 1 in 7 working age adults
suffer from a disability (Taxbriefs, May
2014). Some employers provide income
protection insurance, but a very large
number do not. It’s worth specifically
checking the position with your employer.
Income protection can appear relatively
expensive, but can be very valuable if you
fall seriously ill.
It is normally advisable for income
protection insurance to be inflationprotected in two main ways. You should
be able to increase the level of cover
from time to time regardless of your state
of health, or the cover should increase
automatically in line with inflation or some
fixed percentage. But it’s also important
to make sure that the benefit payments
themselves keep pace with inflation
otherwise, if the benefit payments never
increased after you fell ill and could not
work, their real value would be gradually
eroded over the years.
Critical illness insurance pays a lump sum
if you are diagnosed as suffering from a
specified illness. The advantage of critical
illness insurance is the benefit is paid
shortly after diagnosis of the illness, without
any significant delay – unlike the waiting
period of income protection. It’s also in
the form of a lump sum that can allow
you to make rapid adjustments to your
lifestyle and pay off loans. People often
take out critical illness insurance to cover
a mortgage or other loan. Because you
are more likely to have a critical illness
than die, it’s more expensive than life
insurance, but this reflects the likelihood of
needing to claim on the policy.
The final area to consider is medical
insurance. These are policies that help
you to afford the cost of private medical
treatment. Private medical insurance
(PMI) pays for private health treatment,
whereas health cash plans pay for
everyday health costs, typically 75% –
100% of costs for dentistry, optical and
consultation costs, plus a small sum for
each day spent in hospital. Insurers are
constantly looking at new ways to meet
people’s needs, such as through life
insurance that includes critical illness and/
or income protection insurance, which
may be cheaper. It’s important to look at
your options and seek the assistance of a
trusted advisor.
I want a better return on my money than
I currently get at my bank and building
society but am nervous of investing in the
stock market. Is it worth the risk?
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