Income incoming: Better to be safeguarded than sorry

Our lifestyles may be diverse, but we’re all united in our belief that financial safeguarding matters, particularly in these ambivalent times. It would be foolish to think that any of us are invincible when it comes to the unexpected – do you know the difference between income protection insurance and critical illness cover, and how they can help you stay on track with your mortgage payments in the event where you become seriously ill or are unable to work?

The twists and turns of this year’s COVID rollercoaster have brought us all back down to earth with a jolt, in many respects, and we’re having to adapt our financial priorities accordingly. One of the many lessons we’ve learned is that there’s no time like the present to have a plan B ready to ensure our mortgage and bills are paid in that dreaded worst-case scenario.

Between 1 March and 31 May 2020, life insurers paid out a staggering £90 million in claims, according to the Association of British Insurers – this was to support families in light of COVID-19 deaths and pay off outstanding mortgages.

Buying a property ranks high as being one of the biggest financial decisions we’ll ever have to make, and along with that comes the responsibility of paying off our mortgage. Any kind of drop in income, albeit temporary, can therefore be a worry in this respect.

“If you are off work ill, for example, you may be able to claim state benefits, but these aren’t necessarily going to cover your mortgage payments,” comments Paul Johnson, Client Banking and Mortgage Manager at St. James’s Place.

One for me, two for you?

Should you one day find yourself in the middle of divorce settlement negotiations, you’ll need to itemise all of your individual and joint assets and liabilities. Some settlements leave the pension out of the equation altogether, as it’s not a requirement to split pensions. As a woman, this might leave you vulnerable if you’ve been a stay-at-home mum, unlike your working partner who has probably been able to build up his pension entitlement over the years.

A common way of legally dividing up a pension following a divorce nowadays is known as a pension sharing order. However, pensions are generally not at the top of the agenda for married couples when working out a fair and equitable deal for both sides – it’s more often than not the jointly owned home that reigns supreme. As a mother, this is quite understandable, as having a roof over your head for you and your children is likely to take precedence.

On this basis, why not take some time out now as a couple now and list all those individual and joint assets, including any properties that you own, business holdings or trusts, and pension and other retirement savings? There’s nothing to lose – it’s an opportunity to take the edge of this somewhat sensitive topic and work towards a joint vision of how financially secure you are, both individually and jointly, for the longer term.

One size doesn’t fit all

Your personal situation will always dictate what kind of protection is most suited to your circumstances, and that’s where professional financial advice comes into its own. In short, the different types of insurance available include:

  • Life insurance: A lump sum paid out on death, this could be used to pay off a mortgage and provide an additional amount of money for your family, depending on the level of cover chosen. Whole of life cover runs for your lifetime, while level term insurance lasts up the point of having repaid the mortgage. Alternatively, there’s decreasing term insurance, which covers you for a set period, such as 10 years, with the level of coverage decreasing over the life of the policy at a fixed rate.
  • Income protection: A tax-free income in case you’re unable to work for an extended period because of an accident or illness. The amount of cover varies depending on the selected plan, and usually starts after a certain period – say, six or 12 months. It may run for several years, until you go back to work or even until you retire.
  • Critical illness policies: A lump sum payout if you’re diagnosed with a condition covered by your plan, such as a heart attack, stroke or cancer.

Your financial adviser can discuss further types of cover in such critical times too, such as rent insurance – this covers rent payments if a tenant is struggling to meet them.

Police your policy

Paula Read, Head of Protection Proposition at St. James’s Place, notes: “Income protection and critical illness cover can be equally important and bundled into a multi-part plan.

“If you suffer a heart attack, for example, you may receive a payout from a critical illness policy, but if you’re off work with a long-term illness, your mortgage payments can still be met via income protection. If you have a family, then life cover is also important to ensure full protection.”

Whatever cover you have, it’s important to review your policy to ensure it continues to meet your needs. Johnson says: “If you have life cover on a decreasing term, for example, beware that this may not be sufficient to cover your mortgage if you move or remortgage.”

He mentions that it’s also worth checking your life cover is structured in the best possible way. For example, if it’s set up in a trust*, payment stays outside your estate for the purposes of Inheritance Tax.

“Similarly, with income protection, you might change jobs and find the policy won’t pay out, or an employer’s cover may make your personal policy redundant,” he adds.

Protecting your income with the professional support of a Wellesley financial adviser couldn’t be simpler – call us today on 01444 244551 as a first step towards a personalised protection plan that fits in with your current circumstances, no matter what the future holds. Be safeguarded – don’t be sorry.

*Trusts are not regulated by the Financial Conduct Authority.

1Association of British Insurers, “Insurers pay £90 million to help families cope with Coronavirus deaths”, August 2020

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