Our ...May 2014 Newsletter
It’s well known that we Brits are more likely to insure our house, car, mobile phone and even our pets before we insure ourselves. But if you consider the financial implications of becoming seriously ill and unable to work for a long period you might think again.
It can have a serious impact on your business as well as your family so our theme this month is how to protect you, your family and your business, as a timely reminder to check whether you are sufficiently covered. Even if you already have cover, it’s worth checking that it’s still appropriate for your circumstances.
We hope you find the articles useful.
In this issue:
What’s your most valuable business asset?
If you asked the question, many businesses would consider their most valuable business asset to be their people. Yet how many businesses have insured themselves against the financial risk of losing a key member of staff through death or serious illness?
Aside from the emotional shock and loss, you could be facing reduced profits, cash flow issues and unplanned replacement costs, not to mention the loss of key skills, contacts and experience. Key Person cover, however, provides a financial safety net to tide the business over and will provide much needed capital during what can be a very difficult time. You can use the funds to pay off loans, ease your cash flow and fund interim and replacement costs.
The insurance is usually arranged so that the business owns the policy and pays the premiums, which may be eligible for corporation tax relief. The key person or ‘life assured’ has no ownership rights to the policy and therefore no tax implications, making it an attractive employee benefit as well.
Shareholder Protection on the other hand ensures you retain control over your business in the event a shareholder or partner dies. Their share in the business would be available for you and your fellow directors or partners to buy, at fair market value, rather than inherited by somebody outside of the business. This is particularly critical if they are a majority shareholder.
The framework you choose will depend on the size of your business and the number of directors, shareholders or partners involved. We strongly advise that you speak to your financial advisor to ensure it is set up as tax efficiently as possible without compromising any existing arrangements you may have in place. Even if you already have cover, it’s worth checking that it’s still relevant and appropriate.
What’s the difference between Critical Illness Cover and Income Protection?
Both these insurances are available for individuals as well as businesses, and provide financial assistance if you are unable to work. The main difference is that Critical Illness cover (CI) pays out a one off lump sum whereas Income Protection (IP) provides a continual income for as long as you need it.
This covers a number of serious, life threatening health conditions, for example, cancer, stroke and heart attack, although the exact conditions covered will vary amongst insurers and policies. If you are diagnosed with a critical illness covered by your policy you will receive a lump sum, free of tax, which could be enough to pay off your mortgage depending on the amount of cover you have. Generally you insure yourself for a fixed sum of your choice, having considered your outgoings and the potential impact of a critical illness on your finances.
You can only claim once on your policy and your illness must be deemed severe enough to qualify. The cost will depend on the sum insured, the number and severity of the conditions covered and your medical history, so you can select a policy that suits your budget and your needs.
It’s crucial to provide your insurer with as much detail as possible about your medical history otherwise you run the risk of having your claim refused.
IP is designed to provide you with a regular income if you are unable to work due to illness or disability.
IP policies will usually pay out 50% to 60% of your salary, tax free (unless paid via an employer scheme in which case you will be taxed as normal). You can make as many claims as you need during the life of your policy and the payments will start after your chosen qualifying or ‘deferral’ period. Selecting a longer deferral period will reduce the cost of your premiums, but check carefully that you have sufficient savings or sick pay to live on until the payments start.
Choose your cover carefully as the cheapest option may not be enough in the long term, eg ‘any occupation’ cover where payments will cease as soon as the insurer deems you fit to work in any occupation at all regardless of your skills and financial commitments versus ‘own occupation’ where you will continue to receive payments until you are well enough to do your own job.
For complete cover it is useful to have both CI and IP in place which will pay off any significant loans and provide you with a regular income whilst you recover.
Given the number of variables and potential pitfalls in choosing the right policy, we strongly advise you speak to your financial advisor who will help you select the best policy for you.
Life Cover Uncovered
It can be very confusing trying to understand all the various life insurance products and jargon used to describe them, so we have set out below the basics of life insurance and what you can expect from each type of product.
Life Insurance or Life Assurance?
Both have exactly the same meaning and the terms are often used interchangeably.
Single Life or Joint Life?
You can buy single cover for one life only (i.e. yours) or joint cover to include your spouse/partner. If the latter, you decide whether the policy will pay out after the first death or the second. The key influencers in this decision will be your estate and IHT planning arrangements.
Whole of Life Insurance
This as the name suggests, covers you for your entire life and tends to cost a bit more as it is guaranteed to pay out at some point! You can select a product that will pay out a fixed amount or you can opt for an investment linked policy that will pay out according to the value of that investment at the time of your death.
You can choose a specific time frame for your cover, eg the life of your mortgage, and this will pay out if you die during the specified period. If you don’t, the policy simply expires at the end of the term. Term insurance provides you with a number of options:
• Level Term Insurance will pay out a set lump sum and is usually sold alongside your mortgage to ensure it is paid off in the event of your death.
• Decreasing Term Insurance will also pay out a lump sum but the amount decreases over the life of the policy so it is usually sold alongside repayment mortgages as your mortgage debt will also be decreasing over time.
• Family Income Benefit Insurance – rather than a lump sum this policy will pay out a regular income to your family if you die during the term.
As with all insurance, your policy will only remain valid as long as you continue to make payments. We would also strongly suggest you seek professional advice to help you select the most appropriate policy for you and your circumstances.
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