Life insurance, mortgage protection, income protection, critical illness cover – it might seem dull to think about, but protection could prove to be a life-changing decision, and one never regretted by those who have need to call upon it. With a wide range of protection options available, NM Finance can advise on the best product to suit your personal circumstances, but a recent case study demonstrates that a good quality protection policy really is worth its weight.
What is a mortgage protection plan?
A married couple took out a mortgage protection plan with joint cover to settle the balance of their property loan, should one of them die during the lifetime of the mortgage. In addition, the mortgage protection policy included a tax-free lump sum on death, providing an extra financial cushion should the worst happen.
Both in their early 40s, husband and wife were in good health and there was no reason to think that they should need to call upon the policy. However, a few years after they took the mortgage protection plan, the wife had to undergo a routine operation and, after a short illness, tragically died a month later.
She had been the household’s primary breadwinner, which would have undoubtedly left her widower struggling to pay the mortgage and household bills. In fact, the policy paid out in full, clearing the outstanding mortgage and providing funds to support her family during a tough period.
Writing a plan in trust for tax efficiency
Life insurance can help our dependents, but a policy payout does have the potential to increase the amount of inheritance tax due by an estate. One way to address this is to write a plan in trust, also referred to as a discretionary trust, for a life policy. This legal arrangement allows the owner of a life policy to give their policy to a trusted group of people (trustees) to look after and, in turn, pass on to the beneficiaries.
Kept ‘in trust’, the money paid out from a life policy would not form part of the estate of the person covered, minimising inheritance tax duties. In the event that both parents die, a life policy can be held in trust to provide some financial support for children without giving full access, allowing for a managed release of funds.
How important is income protection cover?
Of course protection can be equally important during our lifetime too. Income protection will provide a monthly, tax-free income if you suffer a serious illness or injury until you are well enough to go back to work. It provides a valuable buffer if your sick pay runs out before you are fully recovered or for the rest of the policy term if you are unable to return to work. Some income protection policies will pay as early as seven days after you stop working, can offer a ‘back-to-work’ cash bonus and may even provide benefits such as discounts and rewards if you don’t make a claim on the policy.
How important is critical illness cover?
Ensuring that your income is protected and your family doesn’t encounter financial hardship should you be diagnosed with a critical illness is important to all of us, but especially acute if you run your own business. Whether or not your ability to run your business and pay yourself is compromised, there is no doubt that alleviating the pressure and being able to focus on your recovery is the most important consideration if you are diagnosed with an illness.
For business owners, it may be more tax efficient to pay the premiums for personal life insurance, income protection and critical illness cover through the company. Although it is important to take professional advice from your business’ accountant, personal cover of between £200-300k can be paid directly by the business and offset as an expense, offering precious tax savings.
Should I choose a critical illness policy or serious illness cover?
Similarly, critical illness cover can offer even greater protection, which can be particularly beneficial to business owners – typically covering 40-50 conditions, some policies even pay out a cash lump sum based on the severity of a diagnosed condition.
Based on the severity, these policies can pay a percentage of the cover which means that if an early diagnosis and treatment minimises the impact of a critical illness, it will pay a portion to help support you during this time, but leaving the rest of the cover intact, should you need to claim again at a later date.
This kind of flexible policy creates a strong financial support at the time you need it most, but without creating a ‘one-time’ payout that could leave you struggling to pay the bills over the long-term.