How to protect yourself and your family in case you die or can’t work

Something odd is happening in this country

Pet insurance is more popular than life insurance, about twice as popular actually. 

We value our pets’ lives more than our own. I should know because I’m in that boat, or was in that boat. I’m Will, Damo’s Co-Founder by the way, and my dog Toothless (who you sometimes hear on the podcast) was insured for years, but not me.

This changed after having Naomi on the podcast (video above), because I don’t want to leave my wife in a jam if I’m not here. 

If you don’t have a partner or kids, you don’t really need to worry about life insurance. But if you do then it’s worth considering because it’s normally the difference between your partner and kids being ok or not if you die.

If you don’t have a partner or kids, you might still want to think about income protection, so you’ll have an income even if something happens that means you can’t work any more. 

We’ve talked about the upside you can get from investing and pensions in previous emails. This one is about protecting your downside, so you’re nice and secure financially, whatever happens. 

We’re doing this because there’s a 1 in 4 chance of suffering a critical illness before 65 years old - and there’s a 19% chance of dying in the UK before 65 years old (source)


Life insurance

This gets paid out after you die, so is the key way to protect your family if you end up six feet under.

98% - 99% of life insurance claims get paid out, which we found quite reassuring to be honest.

If you want to take out life insurance, you’ll have to answer health questions, which get checked against your medical records. And sometimes you’ll also be asked to do a health check (paid for by the insurer).

The key thing, like with all insurance, is to be completely honest so the insurer doesn’t have a reason to not pay out. You’re getting life insurance because you want your family to be ok, so you don’t want to jeopardise that.

In terms of how much you want to get insured, it of course depends on your circumstances but it’s fairly typical to insure enough to pay off the mortgage (if you have one), and then ideally more on top for some living expenses for your family, either in a lump sum or monthly payment. A lump sum policy is more expensive than a monthly payout.

Although life insurance premiums stay the same once you’ve taken out a policy (if you have guaranteed premiums), every year you wait before taking out a policy means the premium goes up by 10% - 15%.

This is because you’ll ultimately pay a similar amount overall (all other things being equal), but if you wait 10 years before taking out a policy, you’ll have 10 fewer years to pay your premiums for, so the monthly premium increases in kind.

The other risk of waiting to get life insurance is that something happens to your health in the meantime which means your premiums are way higher - or you can't even get cover. This, and the lower premiums, are the key reasons to get life insurance when you're younger.

One of the good things about life insurance is you can generally wrap it in a trust (and choose your dependents) to shelter any payout from tax. 

Oh, and before taking out life insurance, please check if you get anything through your work, like ‘death in service’, which is basically life insurance via your employer. 


Income protection

If you take out this kind of policy, it will pay you a monthly income if you can’t work because of sickness, disability or an accident.

It’s particularly valuable for self-employed people because employers have to at least pay statutory sick pay for a period of time. 

This is why you should check first what sick pay you get through work if you’re employed. 

Income protection pays out if you can’t work because of ill-health. If you’re an employee you can get this type of cover for up to 60% of your gross income, which gets paid directly to you, tax free. It’s only 60% because the missing 40% effectively accounts for the tax you’d have paid on your gross income.

If you’re a company owner, you can protect up to 80% of your gross income and it’s highly tax efficient because you can pay the premiums from the company as an allowable expense (untaxed).

You can choose how long the term should be, but it’s normally up to the age you want to retire, e.g. 65 years old. This of course affects the price.

You can claim on income protection as many times as you need, e.g. you could be off sick for a few months, so you claim on the policy but then you might go back to work, get sick again and claim again.

You can get ‘budget’ income protection too, which is 50% cheaper but it only pays out for a limited time, like one or two years.


Critical illness

This covers you from a serious health event like being diagnosed with cancer, having a stroke etc. The key thing is that it’s an event - a one-off thing - and it gets paid out in a lump sum, unlike income protection which is a monthly payout.

Critical illness is based on a set of specific illnesses whereas income protection is much broader, e.g. if you injure your back and can’t work, you can claim with income protection but not critical illness.

Once you’ve claimed, you can’t claim again on a critical illness policy again.
 

Have questions or want to get cover?

We work with Naomi from Heath Protection who appeared in this episode. You can contact her here: contactus@heathprotection.co.uk.

Of course there are lots of other brokers, so please have a look around and choose someone you like. Just make sure they’re ‘whole of market’ i.e. can offer you all the products, not just a select few.

And be wary of a broker who says they’ll charge you a fee on top of them getting paid commission by the insurer.

This is not financial advice. The reason it’s not financial advice is because it’s not tailored to you. We are here to talk about the principles of building wealth but if you want personalised help, it’s worth speaking to a financial advisor. As with everything financial, please do your own research. We really encourage that because no one cares more about your money than you and if you learn the basics then it’s life-changing.

If you get a product through Naomi’s company Heath Protection, we’ll receive a commission from them but it won’t affect the price you pay.

Previous
Previous

What you need to know about property in the UK

Next
Next

How to sort your pension so you can retire well