Types of Protection
There are many different Protection packages out there, and we’ll take the time to make sure that you fully understand each one.
Critical illness cover
Critical illness cover (CIC) is a long-term insurance policy designed to pay a lump sum on the diagnosis of certain life-threatening or debilitating (but not necessarily fatal) conditions such as a heart attack, stroke, cancer, multiple sclerosis and loss of limbs. The illnesses covered differ between insurers, but these will be specified within the policy, along with any exclusions and limitations. CIC policies usually only pay out once, so are not a replacement for income.
If you are an employee and you fall ill, your employer might pay you your full pay for a few weeks or months. By law, an employer must pay most employees statutory sick pay for up to 28 weeks, though this will probably be a lot less than your full earnings. But after this time, you will normally be dependent on state benefits.
However, it’s important to check what you are entitled to. Some employers arrange group Income Protection Insurance for their employees as a perk of their job, which can pay out an income after the statutory sick period.
If you are self-employed, you won't have this option available to you. State benefits are not generous, and you would probably see a substantial drop in your income if you were out of work for more than a few months because of illness or disability.
Income Protection Insurance aims to put you back to the position you were in before you suffered a loss, without you making a profit. So the maximum amount of income you can replace through insurance is broadly the after-tax earnings you have lost less an adjustment for state benefits you can claim. This usually translates into a maximum of 50% to 60% (source: Aviva Website – 16/09/09) of your before-tax earnings.
Life insurance is about providing some financial security for the people dependent on you in the event of your death. It’s really crucial that you seek professional financial advice to ensure that you put in place the right amount of cover with the right terms and conditions.
If you’re considering life insurance, it’s important to realise that there are two main types: term insurance and whole-of-life insurance. Term insurance (also called term assurance) pays out only if you die within a certain term, whereas whole-of-life insurance pays out whenever you die and however long you live. Some whole-of-life policies also contain an investment element, but such investment-type policies cost a lot more than protection-only insurance.
Mortgage payment protection (MPPI)
This type of protection is also called accident, sickness and unemployment insurance. A typical policy will start to pay your mortgage repayments and associated costs one month after your income stops due to redundancy, accident or illness. It will continue to pay for either 12 or 24 months.
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