Protection Guide

Life Insurance, Critical Illness & Income Protection

Most people understand why they insure their home, car or mobile phone.

Protecting the income that pays for those things — and the people who depend on it — can sometimes receive much less attention.

Protection insurance is designed to provide financial support when certain unexpected events occur. Depending on the type of policy, this could mean providing money following death, diagnosis of a specified critical illness, or being unable to work because of illness or injury.

Protection isn't only relevant when taking out a mortgage, and it isn't only for homeowners.

Whether you are buying your first home, raising a family, renting, self-employed or running a business, it can be useful to consider what would happen financially if your circumstances suddenly changed.

This guide explains some of the main types of protection and the questions worth considering.

What Is Protection Insurance?

Protection insurance is a broad term covering insurance policies designed to provide financial support following particular insured events.

Common types of personal protection include:

• Life Insurance

• Critical Illness Cover

• Income Protection

• Family Income Benefit

Different policies solve different financial problems.

Life insurance, for example, isn't designed to replace your salary if you're unable to work because of illness.

Income protection isn't normally designed to repay your entire mortgage immediately following death.

Understanding the purpose of each type of cover is therefore important.

Do I Need Protection If I Have a Mortgage?

A mortgage creates a significant financial commitment.

One of the questions worth considering is:

What would happen to the mortgage if I died or became seriously ill?

For a couple buying together, consider whether either person could maintain the mortgage and household expenditure without the other's income.

For someone buying alone, consider what would happen if illness or injury prevented them from earning.

The answer will be different for every household.

Protection should therefore be based on your circumstances rather than simply attaching an insurance policy to the mortgage.

Protection Isn't Just for Homeowners

You don't need a mortgage to have a financial need for protection.

Someone renting a property still needs money to pay:

• Rent

• Utilities

• Food

• Council Tax

• Transport

• Childcare

• Loans

• Other household expenditure

If their income stopped because of illness or injury, those bills wouldn't necessarily stop too.

Similarly, parents may want to protect their family even if they don't have a mortgage.

The financial risk exists because people depend on income — not simply because someone owns a property.

What Is Life Insurance?

Life insurance is designed to pay a benefit if the insured person dies during the policy term, subject to the policy terms and conditions.

The money could potentially be used by the beneficiaries for purposes such as:

• Repaying a mortgage

• Maintaining household finances

• Supporting children

• Replacing lost financial contribution

• Meeting other financial commitments

The appropriate amount and term of cover depend on what you're trying to protect.

Level Term Life Insurance

With level term insurance, the amount of cover is generally designed to remain the same throughout the policy term.

For example, if someone takes a specified amount of level life cover for a particular term, the insured amount normally remains at that level during the term, subject to the policy conditions.

This can potentially be useful where the financial need isn't expected to reduce alongside a repayment mortgage.

Decreasing Term Life Insurance

Decreasing term insurance is designed so that the amount of cover reduces over time.

It is commonly considered alongside a repayment mortgage because the outstanding mortgage balance is also expected to reduce over time.

However, the policy and mortgage don't necessarily reduce at exactly the same rate.

You should understand how the particular policy operates before assuming that it will always precisely match the outstanding mortgage.

Joint or Individual Life Insurance?

Couples may be able to consider joint or separate individual policies.

A joint-life policy commonly pays according to the insured event specified in the policy and may end following a valid claim, depending on its structure.

Separate policies can potentially provide separate cover for each person.

The appropriate structure depends on factors including:

• Required cover

• Budget

• Family circumstances

• Existing protection

• Future flexibility

• Individual health and underwriting

Price shouldn't be the only consideration when deciding how protection should be structured.

What Is Critical Illness Cover?

Critical Illness Cover is designed to pay a benefit if the insured person is diagnosed with a specified critical illness and meets the insurer's definition and policy conditions.

Policies cover specified conditions rather than every illness.

This distinction is important.

Simply becoming seriously unwell doesn't automatically mean a critical illness claim will be payable.

The diagnosis must meet the relevant definition contained within the policy.

What Can Critical Illness Cover Be Used For?

A valid critical illness benefit could potentially help with financial pressures such as:

• Repaying or reducing a mortgage

• Household bills

• Adjusting the home

• Supporting a period away from work

• Childcare

• Other financial commitments

How the money is ultimately used will depend on the policy structure and the claimant's circumstances.

Does Critical Illness Cover Every Cancer?

No.

Critical illness policies contain specific definitions and conditions.

Cancer cover, for example, depends on the insurer's policy wording and whether the diagnosis meets the required definition.

The same principle applies to other conditions.

This is why comparing critical illness policies solely by price can be misleading.

The definitions and features of the cover matter too.

What Is Income Protection?

Income Protection is designed to provide a regular income if illness or injury prevents you from working and you meet the policy's definition of incapacity.

Rather than providing one large lump sum, it is generally designed to replace part of your income.

This can help you continue meeting regular expenditure while you're unable to work.

Why Can Income Protection Be Important?

Think about everything your income currently pays for.

That might include:

• Mortgage or rent

• Food

• Utilities

• Council Tax

• Transport

• Childcare

• Insurance

• Loans

• Everyday household expenditure

Now consider how long you could maintain those commitments if your salary stopped.

Savings may provide a temporary buffer.

Employer sick pay may help.

State benefits may provide some support depending on eligibility.

But these may not replace your normal income indefinitely.

Income protection is designed to address this particular financial risk.

How Much Does Income Protection Pay?

Income protection policies generally insure a proportion of eligible earnings rather than replacing all of your normal income.

The amount available depends on the insurer, your earnings and the policy terms.

There may also be limits on which types of income can be insured.

The appropriate benefit should therefore be established based on your circumstances and the insurer's rules.

What Is a Deferred Period?

The deferred period is the period you normally need to remain unable to work before income protection benefits begin, subject to the policy terms.

For example, someone with substantial employer sick pay may be able to consider a different deferred period from someone who would receive little or no income after becoming unable to work.

Your:

• Employer sick pay

• Savings

• Existing cover

• Household income

should therefore be considered when selecting a deferred period.

How Long Can Income Protection Pay?

This depends on the policy.

Some policies can potentially pay an eligible claim for a limited period.

Others can potentially continue paying while the insured person continues to meet the policy's claim definition, up to the applicable policy end date.

This is an important difference when comparing policies.

A cheaper policy isn't necessarily providing equivalent cover.

What Is Family Income Benefit?

Family Income Benefit is a form of life insurance designed to provide a regular benefit for the remaining policy term following a valid claim, rather than necessarily providing one large lump sum.

For example, parents might consider the financial support their family would need each month if one parent's financial contribution disappeared.

It can therefore be useful when the protection objective is replacing ongoing family income rather than simply repaying a single debt.

What About Children's Critical Illness Cover?

Some protection policies may include or offer options relating to children's critical illness cover.

The exact conditions, amounts, definitions and eligibility vary between insurers and products.

Although a child may not be contributing financially to the household, a serious illness could still have significant financial consequences for parents.

A parent may need to reduce working hours, stop working temporarily, travel for treatment or meet additional expenses.

Policy features should be reviewed carefully to understand exactly what protection is provided.

I Get Protection Through Work – Do I Still Need My Own Policy?

Employer benefits should absolutely be considered when assessing your protection needs.

Depending on your employer, benefits might include:

• Death in service

• Sick pay

• Group income protection

• Group life insurance

• Private medical insurance

• Other employee benefits

But understand exactly what you have.

Ask:

• How much would it pay?

• How long would it pay for?

• When does it start?

• What circumstances are covered?

• Does the benefit continue if I leave the employer?

Employer benefits can form an important part of your protection planning, but they shouldn't simply be assumed to cover every financial need.

What Is Death in Service?

Death in service is an employee benefit that may provide a payment if an eligible employee dies while covered by the employer's scheme.

The benefit is often linked to salary, although schemes vary.

It isn't necessarily the same as having an individual life insurance policy.

Importantly, employer benefits are connected to employment and scheme membership.

Changing employer could therefore change or remove the benefit.

What If I Already Have Life Insurance?

Don't automatically cancel an existing policy because you're arranging a new mortgage or reviewing your protection.

An existing policy may still be valuable.

Before making changes, establish:

• Amount of cover

• Type of cover

• Policy term

• Premium

• Whether it is level or decreasing

• Critical illness benefits

• Other policy features

• Who is covered

• Any trust arrangements

Your current health and circumstances may also be different from when the original policy was arranged.

Never cancel existing protection until you understand the consequences and any replacement cover has been appropriately considered and put in place.

How Much Life Insurance Do I Need?

There isn't one figure that applies to everyone.

For some people, repaying the mortgage may be the main objective.

For others, that may only be the starting point.

You might also consider:

• Other debts

• Household expenditure

• Children's financial needs

• Education costs

• Funeral expenses

• Lost income

• Existing savings

• Existing insurance

• Employer benefits

• Other household income

The appropriate amount depends on what financial problem you're trying to solve.

How Long Should Protection Last?

The term should relate to the need being protected.

For example, relevant periods could include:

• Remaining mortgage term

• Until children become financially independent

• Until expected retirement

• Another identifiable financial commitment

Different types of cover don't necessarily need identical terms.

The objective should be to match the protection to the underlying financial need.

What Is Indexation?

Some protection policies allow the level of cover to increase over time, often in relation to an inflation measure specified by the insurer.

The purpose is to help the value of the protection keep pace with increasing costs over a long period.

If the cover increases, the premium will generally also change in accordance with the policy terms.

Indexation can be particularly relevant for long-term protection because a fixed amount of money may have less purchasing power many years in the future.

What Is Underwriting?

Underwriting is the insurer's process of assessing an application for protection.

You may be asked questions concerning matters such as:

• Health

• Medical history

• Occupation

• Smoking status

• Lifestyle

• Family medical history

• Existing cover

Depending on the application, the insurer may request additional medical information.

The outcome can vary.

An insurer may offer standard terms, alter the premium, apply exclusions or conditions, postpone a decision or decline cover.

Why Is Medical Information Important?

Answer insurance application questions carefully, accurately and completely.

The insurer uses the information provided to decide whether and on what terms it can offer cover.

If you're unsure how to answer a question, ask rather than guessing.

Protection is intended to be there when something serious happens, so ensuring the application is completed accurately is extremely important.

Does Protection Get More Expensive as I Get Older?

Age is one of the factors insurers can use when pricing protection.

Health, smoking status, occupation, amount of cover, policy term and the type of protection can also influence the premium.

This means the cost of arranging a new policy later may differ from the cost available at a younger age.

However, price alone shouldn't determine whether a policy is appropriate.

What If I Have an Existing Medical Condition?

Having an existing medical condition doesn't automatically mean protection is unavailable.

Different insurers can assess medical conditions differently.

Depending on the circumstances, an insurer could:

• Offer standard terms

• Increase the premium

• Apply an exclusion

• Modify the terms

• Request additional medical information

• Postpone the application

• Decline the application

This is another reason insurer selection can be important.

What If I Smoke or Vape?

Insurers have their own definitions concerning smoking, vaping and nicotine use.

These can affect underwriting and premiums.

Answer the insurer's questions accurately, including questions about nicotine products.

Don't describe yourself as a non-smoker unless you meet the particular insurer's definition.

Is the Cheapest Protection Policy the Best?

Not necessarily.

Price matters because protection needs to remain affordable.

But two policies with similar names can contain different:

• Definitions

• Features

• Exclusions

• Claim periods

• Additional benefits

• Children's cover

• Support services

• Policy options

The objective isn't simply to find the lowest monthly premium.

It is to understand what you're actually protecting and what the policy provides.

What Is Private Medical Insurance?

Private Medical Insurance, commonly shortened to PMI, is different from life insurance, critical illness cover and income protection.

It is designed to cover eligible private medical treatment in accordance with the policy terms.

It doesn't normally replace your income simply because you're unable to work, and it isn't designed to repay your mortgage following death.

Someone may therefore have PMI and still have a separate need for other forms of financial protection.

Personal Protection vs Business Protection

Personal protection focuses on protecting individuals and their families.

Business owners can have additional financial risks.

Depending on the business, these could involve considering areas such as:

• Key Person Protection

• Shareholder Protection

• Relevant Life Cover

• Business Loan Protection

The purpose and tax treatment of business protection arrangements can be different from personal protection.

Professional advice should be obtained when considering business protection.

What Is Key Person Protection?

Key Person Protection is designed to help protect a business against the financial impact of the death or specified illness of an important person, depending on the type of cover arranged.

A key person might be someone whose knowledge, relationships, skills or contribution is particularly important to the business.

The policy is intended to address a business financial risk rather than an individual's personal mortgage.

What Is Shareholder Protection?

Shareholder Protection can help business owners plan for what could happen to company ownership if a shareholder dies or, depending on the arrangement, experiences a specified serious illness.

These arrangements can involve both insurance and legal agreements.

Appropriate legal and tax advice may therefore be required alongside protection advice.

Protection Should Be Reviewed

Protection shouldn't necessarily be arranged once and then forgotten forever.

Your circumstances can change.

Review your protection following major events such as:

• Buying a property

• Increasing your mortgage

• Getting married

• Having children

• Changing employment

• Becoming self-employed

• Starting a business

• Significant income changes

• Moving home

• Divorce or separation

Even if no major event occurs, periodically checking what cover you have can be useful.

Protection Checklist

Start by asking what would happen financially if you couldn't work, became seriously ill or died.

Then consider:

☐ How much is my mortgage or rent?

☐ What are our essential monthly household costs?

☐ Who depends financially on my income?

☐ What savings do we have?

☐ How long would those savings last?

☐ What sick pay does my employer provide?

☐ Do I have death-in-service benefits?

☐ Do I already have life insurance?

☐ Do I already have critical illness cover?

☐ Do I already have income protection?

☐ What happens to my employer benefits if I change jobs?

☐ How much cover would my family actually need?

☐ How long would that need continue?

☐ Have my circumstances changed since my existing policies were arranged?

These questions help identify the financial risk first.

Only then should the appropriate insurance solution be considered.

Protection Is About the Consequences

Nobody can predict exactly what will happen in the future.

Protection planning isn't about assuming that something bad will happen.

It is about understanding the financial consequences if it does.

If you died, who would be financially affected?

If you couldn't work for a prolonged period, how would the bills be paid?

If you experienced a serious illness, would your household have enough financial flexibility to cope?

Once those questions are understood, you can decide which risks you want to protect and which you are comfortable retaining yourself.

Talk to Us About Protection

Cambs Ely Mortgages can help you review your existing protection and understand potential options for life insurance, critical illness cover, income protection and other protection needs.

Protection can involve considerably more than simply selecting an amount of life insurance to match a mortgage.

We can look at your mortgage or rent, income, family circumstances, existing policies, employer benefits and financial commitments before discussing what protection may be appropriate.

We help clients in Ely, Cambridge, Cambridgeshire, East Anglia and across England, with appointments available remotely.

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Important Information

This guide provides general information and shouldn't be treated as personalised financial, protection, insurance, tax or legal advice.

Protection policies have eligibility requirements, terms, conditions, exclusions and limitations. Critical illness policies only cover specified conditions that meet the insurer's applicable definitions. Income protection claims are subject to the relevant policy definition of incapacity and other policy conditions.

The appropriate type, amount and term of protection depend on individual circumstances.

Do not cancel existing insurance until any replacement cover has been appropriately considered and is in force.