Ensure to include all relevant ‘material facts' when opting for CI
A COMFORTABLE retirement now requires more planning than ever before, according to new research by the insurance company LV=.
And that good planning has given us 4.5 million reasons to take out insurance on our income and our health – critical illness insurance or ‘CI'.
It's all linked to our mortgage repayments. More and more people are shocked to find they have no hope of a mortgage-free retirement, and that mortgage payments will drain much of their pension income, long past their retirement age.
LV= say that 4.5m people now working don't think they'll have paid off their mortgage by retirement. The average that will be owed at retirement is £43,000, but 165,000 people will retire owing more than £100,000.
The fact is, 9 per cent (1.2m) of mortgage holders in the UK don't believe they will ever pay off their mortgages.
Of all people aged 55-64, half say they'll be ‘trapped in the workplace' – in order to service their mortgage debt, they'll have to keep on working much longer than they'd have wanted. A quarter will use their pension to keep up payments, a quarter will downsize, 9 per cent will use equity release, and 8 per cent will rent out a room.
Paying off a mortgage is tough enough – but what if you had to stop work, during your working life, due to illness?
It's crucial to make sure that you are financially prepared for any unexpected setback that might temporarily or permanently deprive you of your income.
Which is why I mentioned the topic of critical illness insurance (CI), the insurance that pays out a tax-free lump sum if you can no longer work due to a major disease, condition, or heath problem.
CI covers you against the most common major health problems: cancer, heart attack, stroke, MS, or major surgery. The Association of British Insurers (ABI) tells us cancer is the biggest single reason for critical illness claims, and the National Statistics Office confirms that more than half of us will get some form of cancer in our lives.
Another good reason to consider CI is the second major health problem: heart attack and heart disease. Seven million people in the UK have one of the heart and circulatory diseases, with an average of 545 each day suffering a heart attack.
Cancer, stroke and heart attacks account for 80 per cent of critical illness claims to major insurers. When you add in MS, Alzheimer's and motor neurone disease, you've accounted for 90 per cent of all claims.
If you are struck down and cannot work, CI can pay off that outstanding mortgage and take care of one major financial headache, whether you are retiring or not.
When applying for CI, it is crucial to have your financial adviser explain the pitfalls, and ensure that your form is filled out correctly, including all the relevant ‘material facts'.
The ABI uses the term ‘material fact' to describe information that you must reveal to your insurer, for them to work out how much you should pay for your cover.
The ABI's definition of ‘material fact' is: “An important fact about you or your circumstances that would influence an insurer's decision on whether to issue a policy, and on what terms.”
Very few people deliberately falsify their applications by hiding important information. However, it does happen. People may, for instance, fail to disclose a pre-existing medical condition, or to declare bad lifestyle choices such as tobacco, alcohol or drugs use, choices which later play a role in bringing on their illness. It may also transpire that an illness could derive from ‘unreasonable failure to seek or follow medical advice.'
Most of the time, however, we're talking about what insurers call ‘inadvertent non-disclosure', where we quite innocently fail to divulge some skeleton in the closet (medicine cabinet?) that we honestly didn't know about.
The classic example of this is something that happened in your family history, but was ‘swept under the carpet'. For instance, it's often the case that a person was unaware their father had a mild heart attack, because he had preferred not to talk about it. These issues can, however, later affect your ability to claim on your CI policy.
Are you taking risks in your plan to strive for a mortgage-free retirement, by leaving yourself vulnerable if your health should fail?
Critical illness insurance could mean the difference between sipping a strawberry daiquiri on a Mediterranean cruise, or just stacking the strawberries on a shelf at Asda, when you are approaching 70. Which would you prefer?
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005. Further information on Facebook at Kennedy Independent Financial Advice Ltd or at www.mkennedyfinancial.com