Life insurance guide - what are you worth?
What to consider if you're taking out life insurance.
I'll warn you now – this article does not make for a comfortable read. While the question "how much is your life worth?" may sound like the title of a (bad) comedy, this topic is no laughing matter.
It's about how you'd pay your mortgage, meet all your bills, support your family and generally keep everyday life ticking over, if you were also battling a life-threatening illness or debilitating condition.
It's not a subject any of us like to dwell on too much. But a few hours spent planning a 'what if' scenario now will really pay off in the event that your worst nightmare becomes a reality. Because the last thing you need to worry about at a time like that is 'how long will we be able to survive financially?'
We're all going to die. That's just a fact of life. But even more important is the fact that many of us could also be ill – very ill – for some time before we shuffle off this mortal coil.
This means that as well as life insurance, which pays out once we've gone, we may very well need some sort of insurance to help pay for the everyday things that still need to be paid for, while we recuperate or fight for our lives. It all sounds highly morbid, and it is. But it has to be faced, especially if you have a family to support.
Take the Big C. A new study estimates there were 3.2 million new cases of cancer in Europe in 2006 - up from 2.9 million in 2004 – with the top four killers being lung, colorectal, breast and stomach cancer.
Professor Boyle, director of the International Agency for Research on Cancer said: "With an estimated 3.2 million new cases and 1.7 million deaths each year, cancer remains an important public health problem in Europe."
The frightening truth is that in the UK, more than one in three people will be diagnosed with the disease at some point in their lives, and a quarter of people will die from it.
The more positive news (if we can call it that) is that the rise in breast cancer diagnoses was in part due to effective screening programs picking up the disease, often at an early stage. The same goes for prostate cancer, with the new PSA test making it the most frequently diagnosed cancer in men.
The bad news though, is that our increasingly ageing population means that, in line with other cancers, deaths from prostate cancer have increased 16% since 1995.
The problem is twofold. The older we get the greater our risk of contracting a serious disease, and the more advanced medical science becomes, the better our chances of surviving these diseases. Which means more and more people end up living with illness.
This is where life, and especially critical illness insurance comes in. And with it comes a host of questions.
What sort of insurance do I need?
The first question you need to ask is whether you need term assurance - the potential of a lump sum payout for a fixed period should you die or become terminally ill in that time - or critical illness cover, that pays a monthly income to support you and your family at a time when you're unable to work. Or both. It's cheaper to combine the two and have a plan that pays out if you either suffer a critical illness or die.
There is also pension term assurance to take into account, which you buy with your pension and is usually a cheaper form, although providing more restrictive cover. And finally mortgage protection to consider (which you may well already have opted for when you took out your mortgage).
Is a joint life insurance policy a good idea?
Joint life policies usually pay out on the death of the first policyholder, leaving the second person uninsured at an age when the premiums shoot up in price. Separate policies may be dearer initially, but more often than not they're worth opening at the start.
Does my spouse / partner need a separate critical illness policy?
Again, as a couple, it pays to think about taking out two separate critical illness policies. This means that if one of you claims on your policy, the other still has cover in place.
How much should I insure my life for?
This should be really straightforward. But the amount you decide upon depends on a variety of factors, including the size of your mortgage, any outstanding debts and the number of dependants you have. You may have school and university costs to factor in. You may also consider how much your family will need for funeral expenses.
It's really important to get the calculations right so that your lump sum provides the support your family will need. Try and picture the situation in the event of your premature death or diagnosis of a serious or terminal illness. Then consider the effect the loss of your income will have - including potential childcare costs and the effects of inflation.
Once you've got your policy in place, make sure you review it regularly. A recent survey showed that a third of people haven't reviewed their policies in the past five years. Yet any change in your personal circumstances (e.g. marriage, divorce, or having a baby), your health (e.g. illness, diagnosis of a medical complaint, or becoming overweight) or your financial matters, all make a review essential.
And always, always, ALWAYS write your policy 'in trust'. This way, when you die the money goes straight to the person (or people) you want it to, saving the 40% tax that could be liable if the sum is passed to your estate and becomes subject to inheritance tax. Your insurer should be able to provide the necessary paperwork free of charge.
And what about specialist cover? A new form of insurance has arrived in the UK and caused quite a commotion. Namely, Virgin's Big V Cancer Cover.
On the basis of the latest cancer figures, you can see where Virgin got its idea from. It's the only insurance of its type in the UK, and is designed to pay out if you're diagnosed with any one of a number of cancers. "Happily" it also covers you for death and terminal illness.
Its unique selling point is that while most companies don't pay out for early stages of cancer, Virgin Cancer Cover pays out even if you're "fortunate" enough to get an 'early cancer' diagnosis. I say fortunate because while it's unfortunate that cancer has been diagnosed at all, your chances of recovery and cure are known to be better if cancer is caught in the early stages. If you're very unfortunate and have several different cancers over time, you can claim for each one.
One thing to bear in mind though is that the scheme only covers policyholders up to the age of 69, yet the chance of developing cancer goes up once you hit 70.
The big question is whether Virgin is cynically cashing in on people's fears. After all, why would your average healthy man or woman in the street, pick out cancer as a possible killer when there are plenty of others (heart disease and multiple sclerosis, to name two) just as prevalent.
It's a bit like insuring yourself against getting hit by a bus, or falling down stairs. You just wouldn't do it.
s Kevin Carr from IFA Lifesearch puts it: "It's like insuring your car against crashing into a wall but not insuring it for driving off a cliff. "If you take out this policy and then have a severe heart attack you'll probably be left wishing you'd gone for critical illness cover."
Insuring against your genes
If however you have a family history of cancer, taking out Virgin's cancer cover looks perfectly sensible. The sad proviso here is that Virgin isn't too keen on signing up anyone with a family history of cancer. As Clare Childs (whose mother and aunt both had breast cancer) found out, such high risk individuals are more often than not deemed ineligible for cover. Or, as Mark Adams discovered (having lost a father to lung cancer and a sister to colon cancer) become liable for a far higher premium. And the same is true for people who've had cancer in the past.
This, said Nick Kerwan from Scottish Widows, which underwrites the Virgin policy, is because the same criteria is used that determines eligibility for all its critical illness policies. "If there is a case with, say, a woman whose mother or sisters had suffered from breast cancer aged 45 then yes, they would attract higher premiums under this policy.
"This is no different to the way critical illness policies are dealt with," Kerwan added.
Ultimately, only you know what's important to you and your family. But do consider life and critical illness cover carefully, to make sure that, should the worst happen, worrying about how to pay day-to-day bills is the last thing on your mind.
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