Insurance is all about the right advice
THEY say that “you don't buy insurance because you are going to die, but because those you love are going to live.”
Good news, then, that there has never been a broader range of insurance products designed to help us protect our loved ones.
However, like so many things in personal finance, this is a bit of a double-sided coin: on the plus side, with ever more varied and tailored insurance policies, we have a rich choice and plenty of scope to find the product that exactly suits our needs.
On the other hand, shopping around and finding that one right product is more complicated than ever, too.
It is not advisable to attempt this alone. Here's why.
A new study by the University of Nottingham has found that today's insurance policies are too complicated for eight out of 10 of the UK population to understand. This is what makes using the advice and guidance of an independent financial adviser so crucial when shopping for insurance.
For the research, people were given a number of insurance policies to read, and then took comprehension tests to see how well they had understood them. The researchers found that all the policies required at least an A-Level education to understand them, and some required undergraduate or even postgraduate level education.
The main problems were a tendency for policy documents to be written with very long, complex sentences, and with a high level of jargon and technical terms.
Perhaps this is partly why, with 27.1m households in the UK, 8.5m people still have not taken out life insurance, and 19 per cent of the population used to have a policy but no longer do.
The first question to ask is: what do I want this insurance to do? Is it to leave a lump sum to my family when I die, or is it to pay off the mortgage or other debts?
Most people's understanding of life cover is ‘Whole of Life' insurance. This is the plain vanilla product which pays out when you die. Well, you might be feeling grand today, but it is reasonable to assume that the policy will some day pay out. Sorry about that. That's why this is a relatively expensive type of life insurance – even though today, it's often cheaper than ever before.
Or perhaps you are looking for a level-term life policy, which covers you for a fixed term and expires if you haven't kicked the bucket by the end of the term. This cheaper option is perfect for covering your mortgage, set to expire when your mortgage is paid off.
Or you might want a decreasing term policy, where the amount of cover decreases over time, in step with the decreasing balance of your mortgage, and then also expires when your mortgage is paid off.
Then there's Family Income Benefit (FIB) insurance, which does not pay a lump sum, it pays a monthly sum to your family for a set term. You could, for instance, set the monthly sum at the level of your monthly wage, so that your income is not lost to your family.
However, the term of FIB begins when you take out the policy, and if you die it pays only for the remainder of the term. In other words, if you die two years into a 20-year family income benefit policy, your family could get £2,000 a month for 18 years. But if you die a year before the policy ends, your family gets £2,000 a month for just one year.
Now. What happens if you don't die? I mean that life insurance is not the only cover you may want to have. Think of Critical Illness insurance (CI), to pay a tax-free lump sum if you have to give up work after surviving a major health setback, such as a heart attack, a stroke, or cancer.
Research shows that a quarter of men and a fifth of women will have to give up work due to illness, during their working life. However, only one family in 10 has critical illness cover.
CI pays a lump sum, but there are also a range of income protection products, which can provide a regular replacement income if you have to stop work. There are even insurance products that can cover you if you are simply made redundant.
All the above options have one thing in common – out there somewhere is the product you need.
We can help you find it, and more importantly, help you understand why it is perfect for you.
:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005. Further information is available on the Facebook page 'Kennedy Independent Financial Advice Ltd' and the website www.mkennedyfinancial.com