Bad news can impact on any one of us at any time, in the form of an illness, or sudden death. We don’t like to think about it, but we do have to plan for it. So having the correct protection strategy in place will enable you to protect your family’s lifestyle if your income suddenly changes due to illness or your premature death. But choosing the right options can be difficult without obtaining professional advice to ensure you protect your family from financial hardship.
2. Welcome
A Guide to
Protection Planning
Welcome to our ‘Guide to Protection Planning’. Bad news can
impact on any one of us at any time, in the form of an illness, or
sudden death. We don’t like to think about it, but we do have
to plan for it. So having the correct protection strategy in place
will enable you to protect your family’s lifestyle if your income
suddenly changes due to illness or your premature death. But
choosing the right options can be difficult without obtaining
professional advice to ensure you protect your family from
financial hardship.
This guide considers many of the different protection options
and the structures into which you could transfer your assets,
which could have lasting consequences for you and your family,
and sets out why it is crucial that you make the correct choices.
We can ensure that you find the right solutions to protect your
assets and offer your family and business lasting benefits.
Obtaining professional advice is essential to making an
informed decision about the most suitable sum assured,
premium, terms and payment provisions. We work with our
clients to create tailored protection strategies that meet their
financial goals and needs and we’re committed to ensuring that
our clients enjoy the best financial planning service available.
As part of our service we also take the time to understand our
client’s unique needs and circumstances, so that we can provide
them with the most suitable protection solutions in the most cost-
effective way. If you would like to discuss the range of protection
services we offer, please contact us for further information.
02 A Guide to PROTECTION Planning
3. CONTENTS
Contents
04 Life assurance
Providing a financial safety net for 17 Financial protection
for you and your family
your loved ones With the abundance of choice, we
can you make the right decisions?
06 Term assurance
You can’t rely on always being there
18 Making a will
for those who depend on you Planning ahead can give you the
peace of mind that your loved ones
08 Whole-of-life
assurance
can cope financially without you
Providing financial protection
with cover that lasts for the rest of 20 Wealth protection
Without proper tax planning,
your life could you end up leaving a huge
tax liability?
10 Income
protection insurance
22 Trust arrangements
How would you pay the bills if Do you have control over what
you were sick or injured and happens to your estate, both
couldn’t work? immediately after your death and for
generations to come?
12 Long-term care funding
Keeping pace with the growing size
of an ageing population 26 Critical illness cover
Choosing the right cover can help
ease your financial pressures
16 Business protection
Don’t overlook your most important
28 Glossary
assets, the people who drive your A guide to the jargon of protection
business
A Guide to PROTECTION Planning 03
4. A Guide to Protection Planning
Life assurance
Providing a financial safety net for your loved ones
Whether you’re looking to provide a n Starting a family The cheapest, simplest form of life
financial safety net for your loved ones, n Becoming a stay-at-home parent assurance is term assurance. It is
moving house or a first time buyer n Having more children straightforward protection, there is no
looking to arrange your mortgage life n Moving to a bigger property investment element and it pays out a
insurance - or simply wanting to add n Salary increases lump sum if you die within a specified
some cover to what you’ve already n Changing your job period. There are several types of
got - you’ll want to make sure you n Reaching retirement term assurance.
choose the right type of cover. That’s
why obtaining the right advice and Relying on someone else to support you The other type of protection available
knowing which products to choose – Personal guarantee for business loans is a whole-of-life assurance policy
including the most suitable sum designed to provide you with cover
assured, premium, terms and payment Your life assurance premiums will throughout your entire lifetime.
provisions – is essential. vary according to a number of The policy only pays out once the
different factors, including the sum policyholder dies, providing the
Life assurance helps your dependants assured and the length of your policy policyholder’s dependants with a lump
to cope financially in the event of your (its ‘term’), plus individual lifestyle sum, usually tax-free. Depending on
premature death. When you take out factors such as your age, occupation, the individual policy, policyholders may
life assurance, you set the amount you gender, state of health and whether have to continue contributing right up
want the policy to pay out should you or not you smoke. until they die, or they may be able to
die – this is called the ‘sum assured’. stop paying in once they reach a stated
Even if you consider that currently If you have a spouse, partner or age, even though the cover continues
you have sufficient life assurance, children, you should have sufficient until they die.
you’ll probably need more later on protection to pay off your mortgage
if your circumstances change. If you and any other liabilities. After that, Tax matters
don’t update your policy as key events you may need life assurance to Although the proceeds from a life
happen throughout your life, you may replace at least some of your income. assurance policy are tax-free, they could
risk being seriously under-insured. How much money a family needs will form part of your estate and become
vary from household to household liable to Inheritance Tax (IHT). The simple
As you reach different stages in so, ultimately, it’s up to you to way to avoid IHT on the proceeds is to
your life, the need for protection will decide how much money you would place your policy into an appropriate
inevitably change. These are typical like to leave your family that would trust, which enables any payout to be
events when you should review your life enable them to maintain their current made directly to your dependants. Certain
assurance requirements: standard of living. kinds of trust allow you to control what
happens to your payout after death and
Buying your first home with a partner There are two basic types of life this could speed up a payment. However,
Having other debts and dependants assurance, ‘term’ and ‘whole-of-life’, they cannot be used for life assurance
Getting married or entering into a but within those categories there are policies that are assigned to (earmarked
civil partnership different variations. for) your mortgage lender.
04 A Guide to PROTECTION Planning
5. A Guide to Protection Planning
Generally speaking, the amount of n hat are your family expenses and
W Life assurance
life assurance you may need should how would they change if you died?
helps your
provide a lump sum that is sufficient to n ow much would the family
H
remove the burden of any debts and, expenditure increase on requirements
dependants to cope
ideally, leave enough over to invest in such as childcare if you were to die? financially in the event
order to provide an income to support n ow much would your family income
H of your premature
your dependants for the required drop if you were to die?
death. When you take
period of time. n ow much cover do you receive from
H
your employer or company pension
out life assurance, you
The first consideration is to clarify what scheme and for how long? set the amount you
you want the life assurance to protect. If n hat existing policies do you have
W want the policy to pay
you simply want to cover your mortgage, already and how far do they go to
out should you die –
then an amount equal to the outstanding meeting your needs?
mortgage debt can achieve that. n ow long would your existing savings
H
this is called the
last? ‘sum assured’.
However, if you want to prevent n hat state benefits are there that
W
your family from being financially could provide extra support to meet
disadvantaged by your premature death your family’s needs?
and provide enough financial support to n ow would the return of inflation to
H
maintain their current lifestyle, there are a the economy affect the amount of
few more variables you should consider. your cover over time?
A Guide to PROTECTION Planning 05
6. A Guide to Protection Planning
Term assurance
You can’t rely on always being there for those who depend on you
It’s essential to have the right sort of Increasing term - the potential payout
life assurance in place. You can’t rely Term assurance increases by a small amount each year.
on always being there for those who provides cover for a This can be a useful way of protecting
depend on you. There are various ways your initial sum assured during periods
fixed term, with the sum
of providing for your family in the event of rising inflation.
of your premature death, but term
assured payable only on
assurance policies are the simplest death. You can choose how Index-linked term - some insurers
and cheapest form of cover. The plans long you’re covered for, for provide you with the option for the
have no cash-in value or payments premium to be increased each year in
example, 10, 15 or
on survival as their design is limited relation to the Retail Price Index.
to protecting your family. However,
20 years (the term).
you could also use term assurance in Convertible term - you have the option
relation to estate planning and for the to convert in the future to another
payment of mortgages or other debts. amount whether you died on the first type of life assurance, such as a ‘whole
day after taking the policy out or the of life’ or endowment policy, without
Term assurance provides cover for day before it expired. This tends to be having to submit any further medical
a fixed term, with the sum assured used in conjunction with an interest- evidence. This conversion option
payable only on death. You can choose only mortgage, where the debt has allows you to adapt your plan if your
how long you’re covered for, for to be paid off only on the last day of circumstances change. You can convert
example, 10, 15 or 20 years (the term). the mortgage term. With level term (usually within certain limits) part or all
Premiums are based primarily on the assurance, premiums are fixed for the of your life assurance cover at any time
age and health of the life assured, the duration of the term and a payment during the term. And, importantly, you
sum assured and the policy term. The will be made only if a death occurs won’t be asked any health questions at
older the life assured or the longer the during the period of cover. A level term the date of conversion.
policy term, the higher the premium assurance policy is taken out for a fixed
will generally be. term. This type of term assurance policy If the level of cover you selected at
can also be useful for providing security the start remains the same, then the
Term assurance policies can be written to dependants up to a certain age. premiums will too. If you survive the
on a single life, joint life (first or second policy term without any conversion of
death) or on a life-of-another basis. Decreasing term - the cash payout the plan, there will be no pay out. As
You must have a financial interest in reduces by a fixed amount each year, this type of policy provides cover only
the person that you are insuring when ending up at zero by the end of the in the event of death (plus the option
taking out any life-of-another policy term. Because the level of cover falls to convert), there is no surrender value.
and the provider may require proof of during the term, your premiums on this So if you stop paying the premiums
this before cover is given. type of policy are lower than on level at any time, your cover would cease
policies. This cover is often bought to immediately and you would not receive
There are several types of term assurance: run alongside repayment mortgages, any money back.
where the debt reduces during the
Level term - this offers the same payout mortgage term.This type of term Renewable term - some term
throughout the life of the policy, so your assurance is less expensive than level assurances are ‘renewable’ in that,
dependants would receive the same term assurance. on the expiry date, there is an option
06 A Guide to PROTECTION Planning
7. A Guide to Protection Planning
for you to take out a further term
assurance at ordinary rates without
providing evidence of your health
status, as long as the expiry date is
not beyond a set age, often 65. Each
subsequent policy will have the same
option, provided the expiry date is not
beyond the limit set by the life office.
Family income benefit - instead of
paying a lump sum, this offers your
dependants a regular income from the
date of your premature death until the
end of the policy term. This is one of
the least expensive forms of cover and
differs from most other types in that
it is designed to pay the benefit as an
income rather than a lump sum. In the
event of a claim, income can be paid
monthly, quarterly or annually and under
current rules the income is tax-free. To
ensure that income payments keep pace
with inflation, you can usually have them
increased as inflation rises. It’s also
possible to take a cash sum instead of
the income option upon death.
Family income benefit can also include
critical illness cover, which is designed
to pay the selected income if you are
diagnosed with a critical illness within
the chosen term. It is a fixed term
and you won’t be able to increase
your cover or extend the term. If you
become ill towards the end of the term
(duration of your policy), you might not
be able to obtain further cover.
A Guide to PROTECTION Planning 07
8. A Guide to Protection Planning
Whole-of-life
assurance
Providing financial protection with cover that lasts for the rest of your life
Whole-of-life assurance policies provide If the review reveals that the same level
financial security for people who depend
There are different of protection can’t continue, you’ll have
on you financially. As the name suggests, types of whole-of-life two choices:
whole-of-life assurance helps you protect assurance policy – some
your loved ones financially with cover that n ncrease your payments
I
offer a set payout from the
lasts for the rest of your life. This means n eep your payments the same and
K
the insurance company will have to pay
outset, others are linked reduce your level of protection
out in almost every case and premiums to investments, and the
are therefore higher than those charged payout will depend on Maximum cover
on term assurance policies. Maximum cover offers a high initial
performance. Investment-
level of cover for a lower premium,
There are different types of whole-of-
linked policies are either until the first plan review, which is
life assurance policy – some offer a set unit-linked policies, linked normally after ten years. The low
payout from the outset, others are linked to funds, or with-profits premium is achieved because very
to investments, and the payout will little of your premium is kept back for
policies, which
depend on performance. Investment- investment, as most of it is used to pay
linked policies are either unit-linked
offer bonuses. for the life assurance.
policies, linked to funds, or with-profits
policies, which offer bonuses. you cancel the policy and cash it in, you After a review you may have to increase
will lose your cover. Where there is an your premiums significantly to keep
Whole-of-life assurance policies pay a investment element, your premiums are the same level of cover, as this depends
lump sum to your estate when you die. usually reviewed after ten years and on how well the cash in the investment
This could be used by your family in then every five years. reserve (underlying fund) has performed.
whatever way suits them best, such as
providing for an inheritance, paying for Whole-of-life assurance policies are also Standard cover
funeral costs and even forming part of available without an investment element This cover balances the level of life
an Inheritance Tax planning strategy. and with guaranteed or investment- assurance with adequate investment
linked premiums from some providers. to support the policy in later years.
Some whole-of-life assurance policies This maintains the original premium
require that premiums are paid all the Reviews throughout the life of the policy.
way up to your death. Others become The level of protection selected will
paid-up at a certain age and waive normally be guaranteed for the first ten However, it relies on the value of units
premiums from that point onwards. years, at which point it will be reviewed invested in the underlying fund growing
to see how much protection can be at a certain level each year. Increased
Whole-of-life assurance policies can provided in the future. If the review charges or poor performance of the
seem attractive because most (but not shows that the same level of protection fund could mean you’ll have to increase
all) have an investment element and can be carried on, it will be guaranteed your monthly premium to keep the
therefore a surrender value. If, however, to the next review date. same level of cover.
08 A Guide to PROTECTION Planning
9. A Guide to Protection Planning
A Guide to PROTECTION Planning 09
10. A Guide to Protection Planning
Income
protection insurance
How would you pay the bills if you were sick or injured and couldn’t work?
Protecting your income should be Income protection insurance aims to own job; however, being covered under
taken very seriously, given the limited put you back to the position you were in ‘Any Occupation’ means that you have
government support available. How before you were unable to work. It does to be unable to perform any job, with
would you pay the bills if you were sick not allow you to make a profit out of your equivalent earnings to the job you were
or injured and couldn’t work? Income misfortune. So the maximum amount of doing before not taken into account.
protection insurance, formerly known as income you can replace through insurance
‘permanent health insurance’, is a financial is broadly the after-tax earnings you have You can also usually choose for your
safety net designed to help protect you, lost, less an adjustment for state benefits cover to remain the same (level
your family and your lifestyle in the event you can claim. This is usually translated cover) or increase in line with inflation
that you cannot work and cope financially into a maximum of 50 per cent to 65 per (inflation-linked cover):
due to an illness or accidental injury cent of your before-tax earnings.
preventing you from working. Level cover - with this cover, if you made
If you are self-employed, then no work is a claim the monthly income would be
Without a regular income, you may find also likely to mean no income. However, fixed at the start of your plan and does
it a struggle financially, even if you were depending on what you do, you may not change in the future. You should
ill for only a short period, and you could have income coming in from earlier remember that this means, if inflation
end up using your savings to pay the work, even if you are ill for several eventually starts to rise, that the
bills. In the event that you suffered from months. The self-employed can take out buying power of your monthly income
a serious illness, medical condition or individual policies rather than business payments may be reduced over time.
accident, you could even find that you ones, but you need to ascertain on what
are never able to return to work. Few of basis the insurer will pay out. A typical Inflation-linked cover - with this cover,
us could cope financially if we were off basis for payment is your pre-tax share if you made a claim the monthly income
work for more than six to nine months. of the gross profit, after deduction would go up in line with the Retail Prices
Income protection insurance provides a of trading expenses, in the 12 months Index (RPI).
tax-free monthly income for as long as immediately prior to the date of your
required, up to retirement age, should incapacity. Some policies operate an When you take out cover, you usually
you be unable to work due to long-term average over the last three years, as have the choice of:
sickness or injury. they understand that self-employed
people often have a fluctuating income. Guaranteed premiums - the premiums
By law, your employer must pay most The cost of your cover will depend on remain the same all the way throughout
employees statutory sick pay for up to your gender, occupation, age, state of the term of your plan. If you have
28 weeks. This will almost certainly be health and whether or not you smoke. chosen inflation-linked cover, your
a lot less than your full earnings. Few premiums and cover will automatically
employers pay for longer periods. If you The ‘occupation class’ is used by insurers go up each year in line with RPI.
find yourself in a situation where you are to decide whether a policyholder is able
unable to return to work, your employer to return to work. If a policy will pay Reviewable premiums - this means
could even stop paying you altogether out only if a policyholder is unable to the premiums you pay can increase or
and terminate your employment. After work in ‘any occupation’, it might not decrease in the future. The premiums
that, you would probably have to rely on pay benefits for long – or indeed at all. will not typically increase or decrease for
state benefits. Some employers arrange The most comprehensive definitions are the first five years of your plan but they
group income protection insurance for ‘Own Occupation’ or ‘Suited Occupation’. may do so at any time after that. If your
their employees, which can pay out an ‘Own Occupation’ means you can make premiums do go up, or down, they will
income after the statutory sick period. a claim if you are unable to perform your not change again for the next 12 months.
10 A Guide to PROTECTION Planning
11. A Guide to Protection Planning
How long you have to wait after making
a claim will depend on the waiting
period. You can usually choose from
between 1, 2, 3, 6, 12 or 24 months. The
longer the waiting period you choose,
the lower the premium for your cover
will be, but you’ll have to wait longer
after you become unable to work before
the payments from the policy are paid
to you. Premiums must be paid for the
entire term of the plan, including the
waiting period.
Depending on your circumstances, it
is possible that the payments from the
plan may affect any state benefits due to
you. This will depend on your individual
situation and what state benefits you are
claiming or intending to claim. If you are
unsure whether any state benefits you
are receiving will be affected, you should
seek professional advice.
Income protection
insurance aims
to put you back to the
position you were in
before you were unable
to work. It does not allow
you to make a profit out
of your misfortune. 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
is usually translated into a
maximum of 50 per cent
to 65 per cent of your
before-tax earnings.
A Guide to PROTECTION Planning 11
12. A Guide to Protection Planning
Long-term
care funding
Keeping pace with the growing size of an ageing population
The funding of long-term care remains n ll those who enter adulthood with
A care costs or to take a charge against a
one of the biggest public policy a care and support need should property to be repaid on the eventual sale
challenges facing the government. As the be eligible for free state support of the home. This could result in very little
baby-boomer generation grows older, it immediately rather than being being left for the surviving family.
is estimated that spending on social care subjected to a means test.
needs to double in real terms over the More often than not, it is the elderly
next twenty years just to keep pace with We may not like to think about it, but a who require care over the longer term
the growing size of the ageing population. growing number of us will need long- and it is typically occasioned by either
term care when we’re older. If you’ve got increasing frailty due to ageing or the
In July 2010, the Commission on Funding elderly parents you may need to pay all or chronic aftermath of acute conditions,
of Care and Support was set up by the part of their care costs. The time when an such as a stroke or a fall. Long-term care
coalition to review the funding system of elderly person needs to go into residential provision may be required if you become
care and support in England. Chaired by care is often a huge strain on family ill or suffer a disability that makes you
Andrew Dilnot, it presented its findings to members. Illness or infirmity may have unable to carry out your usual activities of
the government in its report ‘Fairer Care forced a sudden change in circumstances daily living, with the probability that this
Funding’, published on 4 July 2011. and time may be short. disability will continue over a long period.
Among the recommendations in the Long-term care is care you need for the Long-term care may also be required if
report are: foreseeable future, maybe as a result of a person is mentally impaired. The most
an illness or old age. As you get older, you common form of impairment for elderly
n ndividuals’ lifetime contributions
I might develop health problems that could people is dementia, and a common form
towards their social care costs – which make it difficult to cope with everyday of dementia is Alzheimer’s disease. A
are currently potentially unlimited – tasks. So you may require help to stay in person suffering from dementia will need
should be capped. After the cap is your own home or have to move into a personal supervision and assistance to
reached, individuals would be eligible care home. carry out their normal daily activities.
for full state support for care costs.
This cap should be between £25,000 Many elderly may be faced with the The state may provide some help towards
and £50,000. We consider that decision of having to sell their homes to the costs of this care, depending on your
£35,000 is the most appropriate and pay for care and in many cases it may circumstances. There are other ways to
fair figure. even come down to where they live, a help you cover the cost of care, including
n he means-tested threshold, above
T postcode, with some elderly receiving using savings and investments.
which people are liable for their full better support from their local council
care costs, should be increased from than others. The care required can take many forms,
£23,250 to £100,000. from simple domestic assistance to
n ational eligibility criteria and portable
N Under the Community Care Act 1990, medical interventions, and may be
assessments should be introduced to local councils have the right, by law, to provided in a care home or in the person’s
ensure greater consistency. force the sale of a family home to pay for own home. Many people would have
12 A Guide to PROTECTION Planning
13. A Guide to Protection Planning
A Guide to PROTECTION Planning 13
14. A Guide to Protection Planning
hoped the National Health Service (NHS) powers that local authorities have to Contribution, paid in England. This is
would look after them. But the NHS no include in the means testing assessment paid direct to the home and offsets the
longer covers all the costs associated assets that they consider have been cost of your care.
with the care of incurable conditions in subject to ‘deliberate deprivation’. This
old age. Instead you may be forced to occurs when a resident transfers an asset In Scotland, those who need nursing care
buy ‘insurance’ to pay out if nursing or out of their possession in order to achieve will also be paid a contribution towards
residential care at a later stage is needed. a better position that enables them to personal care costs. However, they do not
obtain assistance. claim Attendance Allowance as well. Many in
Since the Community Care Act, that task Scotland still have to contribute substantial
has been transferred to local councils. The home should be disregarded if the sums towards long-term care costs.
The NHS will only provide and/or pay for care needs are classed as ‘temporary’. If
the Nursing Care Service Component of a the value of your assets, excluding your Many families may still have to pay the
person’s long-term care service needs. All property, is less than £23,250, you should majority of the care costs. There are
other costs and services associated with not have to pay for care for the first 12 a variety of options to consider, and
long-term care are the care recipient’s weeks. Even if your assets are more than professional advice should always be
responsibility unless they qualify for local this initially but are then used up paying taken to evaluate which best suits your
authority assistance. Although in Scotland care home fees, you should be able to circumstances. The main options are:
from July 2002 Free Personal Care has apply for this 12-week disregard once they
been available. drop below the £23,250 limit. A deferred option scheme - if your other
assets are below the means test limit, you
Anyone currently with assets of more It is important not to fall into the trap of can ask the local authority to pay care
than £23,250 for the financial year 2011/12 simply giving your home away to your costs and they will place a charge on your
(in England) will be expected to pay for children. The local authority has the property to be paid on your death. This
their care needs. In most cases, the value right to obtain assets that have been potentially allows your estate to benefit from
of any property owned will be included deliberately disposed of to avoid paying future property price rises, although in the
within this sum. fees. However, the ‘tenants-in-common’ current climate this may not be so relevant.
ownership does not fall under these rules
However, there are certain circumstances because the gift is made only on death. A care fees annuity - from the proceeds
in which the home is excluded. And those of the sale of the home, you can buy
with the foresight to plan in advance may If your care needs are overwhelmingly an annuity to provide a guaranteed
want to make sure they can take advantage medical and are deemed ‘complex and income. This means that the price of care
of this, particularly if their remaining assets unstable’, you may qualify for NHS-funded is capped and protects the remaining
are less than the £23,250 limit. ‘Continuing Care’, which means all bills capital. But for the relatives of those who
are met in full, including residential costs. die shortly after going into care, it could
A property will automatically be ignored if However, the strict eligibility criteria mean prove a more costly option.
a surviving spouse or partner lives there. that few people qualify, and even those
This rule extends to other relatives aged who do are reassessed regularly. Investment options - many people
60 or over who live in the property. So if choose to sell the home and invest the
a daughter, niece or brother has moved If their condition stabilises, their care proceeds, using the income generated
in as a carer, this could help reduce future costs will revert to local authority control, to help pay care fees. Alternatively, the
care costs. More importantly, many which means patients will be assessed property may be rented, with the rental
couples don’t realise that they may be for their ability to pay. But if a relative’s income going towards care. But this
able to take the home out of the care condition worsens, you can ask for them means that the family has to maintain
equation altogether by altering the way in to be reassessed for continuing care. If and manage the property.
which it is owned. you feel that a relative has been wrongly
assessed, you can also appeal to your Trusts
Most couples buying a property do so local social services. You and your spouse or civil partner
as ‘joint tenants’. This ensures that on should each make a provision in your
the death of either party their share is Even those who have to pay their wills ensuring that, upon the first death,
automatically transferred to the other. If own care costs should ensure they the deceased’s half of the property is
this is done, and half the home is passed receive the correct benefits. The main placed in trust for your children or other
on to the children on the death of the one is Attendance Allowance. It is beneficiaries instead of passing directly to
first spouse or placed into a trust on their not means-tested and pays a weekly the survivor.
behalf, then it is possible that the whole tax-free amount, depending on your
home may be disregarded at a later stage level of need. If you are receiving care A trust keeps any designated property
if the surviving spouse needs nursing care. in a nursing home, you should also be owned by the deceased away from
However, you need to understand the eligible for the Registered Nursing Care the council’s reach. At the same time
14 A Guide to PROTECTION Planning
15. A Guide to Protection Planning
it allows the surviving spouse or civil
partner to continue benefiting from the We may not like to think about it, but a growing
assets, which may include the family number of us will need long-term care when
home. On the death of the remaining we’re older. If you’ve got elderly parents you may
member of the couple, the assets owned
need to pay all or part of their care costs. The time
by the trust, together with whatever is
left of the assets of the second spouse when an elderly person needs to go into residential
or civil partner, can be given to the care is often a huge strain on family members. Illness
surviving family. or infirmity may have forced a sudden change
in circumstances and time may be short.
The majority of people own their homes
jointly, which means that, on first death,
the survivor would then own 100 per
cent of the full property value. By
changing the way you own your home to
what is known as ‘tenants-in-common’,
combined with the appropriate trust
planning, this could effectively ensure
that your property is fully protected
should either of you enter into care.
In addition, by changing the way your
assets are invested and held, this could
ensure that your cash or liquid assets
are fully protected from future long-
term care costs.
A gift-and-loan trust can be used to fund
long-term care, with the added benefit of
reducing Inheritance Tax on your estate.
You place a small amount, such as £1,000,
in trust and then lend a large sum, such as
£100,000, to the trustees.
You may not benefit from the trust by
law but you can have the loan repaid,
typically at 5 per cent annually, which
can then be used to pay for care fees.
The trustees can invest the capital, and
the aim is that it grows in value outside
of your estate.
Equity release
Even with recent falls in property prices,
many elderly people may have significant
equity in their homes. Equity-release
schemes are loans against the value of
their home, with interest deferred until
the property is sold, normally on death.
Most lifetime mortgage schemes allow
you to borrow between 20 per cent and
45 per cent of the property’s value. Unlike
selling the property to raise funds for
care-home fees, you will still benefit if the
housing market gains value and you can
also keep your house.
A Guide to PROTECTION Planning 15
16. A Guide to Protection Planning
Business protection
Don’t overlook your most important assets,
the people who drive your business
Every business has key people who If a shareholding director or partner were a ‘cross-option’ agreement or a ‘double
are driving it forward. Many businesses to die, the implications for your business option’ agreement.
recognise the need to insure their could be very serious indeed. Not only
company property, equipment and fixed would you lose their experience and These are essential areas for partnerships
assets. However, they continually overlook expertise, but consider, too, what might or directors of private limited companies
their most important assets, the people happen to their shares. to explore.
who drive the business – a key employee,
director or shareholder. The shares might pass to someone who Different forms of protection
has no knowledge or interest in your
Key person insurance is designed to business. Or you may discover that you Key person insurance - compensates your
compensate a business for the financial can’t afford to buy the shareholding. It’s business up to a pre-agreed limit for the
loss brought about by the death or even possible that the person to whom the loss or unavoidable absence of crucial
critical illness of a key employee, such shares are passed then becomes a majority personnel, including the owner-manager.
as a company director. It can provide a shareholder and so is in a position to sell It is especially appropriate if your business
valuable cash injection to the business to the company. depends on a few employees.
aid a potential loss of turnover and provide
funds to replace the key person. The shareholding directors or partners Critical illness cover - pays a sum of money
in a business enter into an agreement to specific employees or the business
Share and partnership protection that does not create a legally binding owner in the event of a serious illness, such
provides an agreement between obligation on either party to buy or sell as a heart attack or stroke.
shareholding directors or partners in a the shares but rather gives both parties
business, supported by life assurance an option to buy or sell, i.e. the survivor Income protection insurance - protects
to ensure that there are sufficient has the option to buy the shares of the individuals by paying their salaries while
funds for the survivor to purchase the deceased shareholder and the executors of they’re unable to work.
shares. It is designed to ensure that the the deceased shareholder have the option
control of the business is retained by to sell those shares. Private health insurance - funds private
the remaining partners or directors but healthcare for specific employees. As well
the value of the deceased’s interest in In either case it is the exercise of the as being an extra benefit of employment,
the business is passed to their chosen option that creates a binding contract; it could help them to return to work more
beneficiaries in the most tax-efficient there is no binding contract beforehand. quickly after an illness by paying for
manner possible. This type of agreement is generally called rehabilitation treatment.
16 A Guide to PROTECTION Planning
17. A Guide to Protection Planning
Financial protection
for you and your family
With the abundance of choice, we can help you make the right decisions
With so many different protection options available, making We can make sure that you are able to take the right
the right decision to protect your personal and financial decisions to deliver peace of mind for you and your family in
situation can seem overwhelming. There is a plethora of the event of death, if you are too ill to work, require care or if
protection solutions which could help ensure that a lump you are diagnosed with a critical illness.
sum, or a replacement income, becomes available to you in
the event that it is needed.
Protecting your financial plan
Whole-of-life Provides a guaranteed lump sum paid to your estate in the event of your premature
death. To avoid Inheritance Tax and probate delays, policies should be set up under
an appropriate trust.
Level term Provides a lump sum for your beneficiaries in the event of your death over
a specified term. You choose the sum insured and the policy term which is
guaranteed at the outset and remains unchanged throughout the term.
Family income benefit
Provides a replacement income for beneficiaries on your premature death. In the
event of a claim, income can be paid monthly, quarterly or annually and under
current rules the income is tax-free.
Decreasing term Provides a lump sum in the event of your premature death to cover a reducing
liability for a fixed period, such as a repayment mortgage.
Critical illness Provides a tax-free lump sum if you are diagnosed with suffering from one of a number
of specified ‘critical’ illnesses during the term. Some life assurance companies offer to
cover you for both death and critical illness and will pay out the guaranteed benefit on
the first event to occur.
Income Protection Insurance that provides a percentage of your lost income caused by an illness,
accident or disability. Rates vary according to the dangers associated with your
occupation, age, state of health and gender.
Long-term care I
nsurance to cover the costs of care. This can be either immediate care, provided
when you actually need care, or pre-funded care, which is provided in advance in
case you need care in the future.
All these protection options also apply to your spouse and to those who are in civil partnerships.
Choosing the right mix of financial protection for your particular situation is essential to ensure that your specific
requirements are fully covered.
A Guide to PROTECTION Planning 17
18. A Guide to Protection Planning
Making a will
Planning ahead can give you the peace of mind that your loved
ones can cope financially without you
No one likes to think about it but death is n f you’re divorced, you can decide whether
i If you’re married or
the one certainty that we all face. Planning to leave anything to your former partner in a civil partnership
ahead can give you the peace of mind n ou can make sure you don’t pay more
y and there are no children
that your loved ones can cope financially Inheritance Tax than necessary The husband, wife or civil partner won’t
without you and, at a difficult time, helps automatically get everything, although
remove the stress that monetary worries Before you write your will, it’s a good idea they will receive:
can bring. to think about what you want included in
it. You should consider: n ersonal items, such as household
p
Planning your finances in advance should articles and cars, but nothing used for
help you to ensure that, when you die, n ow much money and what property
h business purposes
everything you own goes where you and possessions you have n 400,000 (£200,000) free of tax – or
£
want it to. Making a will is the first step n ho you want to benefit from your will
w the whole estate if it was less than
in ensuring that your estate is shared out n ho should look after any children
w £400,000 (£200,000)
exactly as you want it to be. under 18 years of age n alf of the rest of the estate
h
n ho is going to sort out your estate and
w
If you don’t make a will, there are rules carry out your wishes after your death The other half of the rest of the estate will
for sharing out your estate called the (your executor) be shared by the following:
Law of Intestacy, which could mean
your money going to family members Passing on your estate SUrviving parents
who may not need it, or your unmarried An executor is the person responsible for n f there are no surviving parents, any
i
partner or a partner with whom you passing on your estate. You can appoint an brothers and sisters (who shared the
are not in a civil partnership receiving executor by naming them in your will. The same two parents as the deceased)
nothing at all. courts can also appoint other people to be will get a share (or their children if
responsible for doing this job. they died while the deceased was
If you leave everything to your spouse or still alive)
civil partner there’ll be no Inheritance Tax Once you’ve made your will, it is important n f the deceased has none of the above,
i
to pay, because they are classed as an to keep it in a safe place and tell your the husband, wife or registered civil
exempt beneficiary. Or you may decide to executor, close friend or relative where it is. partner will get everything
use your tax-free allowance to give some
of your estate to someone else or to a It is advisable to review your will every five If you’re married or in
family trust. Scottish law on inheritance years and after any major change in your a civil partnership and
differs from English law. life, such as getting separated, married there were children
or divorced, having a child or moving Your husband, wife or civil partner won’t
Good reasons to make a will house. Any change must be by ‘codicil’ (an automatically get everything, although
A will sets out who is to benefit from your addition, amendment or supplement to a they will receive:
property and possessions (your estate) will) or by making a new will.
after your death. There are many good n ersonal items, such as household
p
reasons to make a will: If you don’t have a will there are articles and cars, but nothing used for
rules for deciding who inherits your business purposes
n ou can decide how your assets are
y assets, depending on your personal n 250,000 (£125,000) free of tax, or the
£
shared – if you don’t have a will, the law circumstances. The following rules are for whole of the estate if it was less than
says who gets what deaths on or after 1 July 2009 in England £250,000 (£125,000)
n f you’re an unmarried couple
i and Wales; the law differs if you die n life interest in half of the rest of the
a
(whether or not it’s a same-sex intestate (without a will) in Scotland or estate (on his or her death this will pass
relationship), you can make sure your Northern Ireland. The rates that applied to the children)
partner is provided for before that date are shown in brackets.
18 A Guide to PROTECTION Planning
19. A Guide to Protection Planning
The rest of the estate will be shared by n if there are no brothers or sisters, then
If you feel that you have not received
the children. to half brothers or sisters (or to their reasonable financial provision from
children if they died while the deceased the estate, you may be able to make a
If you are partners but was still alive) claim under the Inheritance (Provision
aren’t married or in a n if none of the above, then to
for Family and Dependants) Act 1975,
civil partnership grandparents (equally if more than one) applicable in England and Wales. To
If you aren’t married or registered civil n f there are no grandparents, then to aunts
i make a claim you must have a particular
partners, you won’t automatically get a and uncles (or their children if they died type of relationship with the deceased,
share of your partner’s estate if they die while the deceased was still alive) such as child, spouse, civil partner,
without making a will. n if none of the above, then to half uncles
dependant or cohabitee.
or aunts (or their children if they died
If they haven’t provided for you in some while the deceased was still alive) Bear in mind that if you were living
other way, your only option is to make a n to the Crown if there are none of
with the deceased as a partner but
claim under the Inheritance (Provision for the above weren’t married or in a civil partnership,
Family and Dependants) Act 1975. you’ll need to show that you’ve been
It’ll take longer to sort out your affairs if ‘maintained either wholly or partly by the
If there is no surviving you don’t have a will. This could mean deceased.’ This can be difficult to prove
spouse/civil partner extra distress for your relatives and if you’ve both contributed to your life
The estate is distributed as follows: dependants until they can draw money together. You need to make a claim within
from your estate. six months of the date of the Grant of
n o surviving children in equal shares (or
t Letters of Administration.
to their children if they died while the
deceased was still alive)
n f there are no children, to parents
i
(equally, if both alive)
n f there are no surviving parents, to
i
brothers and sisters (who shared the
same two parents as the deceased), or
to their children if they died while the
deceased was still alive
A Guide to PROTECTION Planning 19
20. A Guide to Protection Planning
Wealth protection
Without proper tax planning, could you end up leaving a huge tax liability?
In order to protect family and loved ones, and assets held in some trusts from which exempt from Inheritance Tax whether
it is essential to have provisions in place you receive an income. they were made while both partners
after you’re gone. The easiest way to were still alive or left to the survivor on
prevent unnecessary tax payments such as Against this total value is set everything the death of the first. Tax will be due
Inheritance Tax is to organise your tax affairs that you owed, such as any outstanding eventually when the surviving spouse
by obtaining professional advice and having mortgages or loans, unpaid bills and costs or civil partner dies if the value of their
a valid will in place to ensure that your incurred during your lifetime for which estate is more than the combined tax
legacy does not involve just leaving a large bills have not been received, as well as threshold, currently £650,000.
Inheritance Tax bill for your loved ones. funeral expenses.
If gifts are made that affect the liability
Effective Inheritance Tax planning Any amount of money given away to Inheritance Tax and the giver dies less
could save your beneficiaries thousands outright to an individual is not counted than seven years later, a special relief
of pounds, maybe even hundreds of for tax if the person making the gift known as ‘taper relief’ may be available.
thousands depending on the size of your survives for seven years. These gifts are The relief reduces the amount of tax
estate. At its simplest, Inheritance Tax is called ‘potentially exempt transfers’ and payable on a gift.
the tax payable on your estate when you are useful for tax planning.
die if the value of your estate exceeds In most cases, Inheritance Tax must be
a certain amount. It’s also sometimes Money put into a ‘bare’ trust (a trust paid within six months from the end of
payable on assets you may have given away where the beneficiary is entitled to the month in which the death occurs. If
during your lifetime, including property, the trust fund at age 18) counts as a not, interest is charged on the unpaid
possessions, money and investments. potentially exempt transfer, so it is amount. Tax on some assets, including
possible to put money into a trust to land and buildings, can be deferred
Inheritance Tax is currently paid on prevent grandchildren, for example, from and paid in instalments over ten years.
amounts above £325,000 (£650,000 having access to it until they are 18. However, if the asset is sold before all
for married couples and registered civil the instalments have been paid, the
partnerships) for the current 2011/12 However, gifts to most other types of outstanding amount must be paid. The
tax year, at a rate of 40 per cent. If the trust will be treated as chargeable lifetime Inheritance Tax threshold in force at
value of your estate, including your home transfers. Chargeable lifetime transfers the time of death is used to calculate
and certain gifts made in the previous up to the threshold are not subject to tax how much tax should be paid.
seven years, exceeds the Inheritance Tax but amounts over this are taxed at 20 per
threshold, tax will be due on the balance cent, with a further 20 per cent payable Inheritance Tax can be a complicated
at 40 per cent. if the person making the gift dies within area with a variety of solutions available
seven years. and, without proper tax planning; many
Without proper planning, many people people could end up leaving a huge tax
could end up leaving a substantial tax Some cash gifts are exempt from tax liability on their death, considerably
liability on their death, considerably regardless of the seven-year rule. Regular reducing the value of the estate passing
reducing the value of the estate passing gifts from after-tax income, such as a to chosen beneficiaries. So without
to their chosen beneficiaries. monthly payment to a family member, Inheritance Tax planning, your family
are also exempt as long as you still could be faced with a large tax liability
Your estate includes everything owned in have sufficient income to maintain your when you die. To ensure that your family
your name, the share of anything owned standard of living. benefits rather than the government,
jointly, gifts from which you keep back it pays to plan ahead. As with most
some benefit (such as a home given to a Any gifts between husbands and financial planning, early consideration
son or daughter but in which you still live) wives, or registered civil partners, are and planning is essential.
20 A Guide to PROTECTION Planning
21. A Guide to Protection Planning
A Guide to PROTECTION Planning 21
22. A Guide to Protection Planning
Trust
arrangements
Do you have control over what happens to your estate, both
immediately after your death and for generations to come?
Following the changes introduced by the some of the rules regarding trusts and Beneficiary
Finance Act 2006 trusts still remain an introduced some transitional rules for This is anyone who benefits from
important estate planning mechanism. trusts set up before this date. the property held in the trust. The
A trust arrangement can ensure that trust deed may name the beneficiaries
your wealth is properly managed and A trust might be created in various individually or define a class of
distributed after your death, so that it circumstances, for example: beneficiary, such as the settlor’s family.
provides for the people who depend on
you and is enjoyed by your heirs in the n when someone is too young to handle
Trust property
way you intend. their affairs This is the property (or ‘capital’) that is
n when someone can’t handle their
put into the trust by the settlor. It can be
A trust is often the best way to achieve affairs because they’re incapacitated anything, including:
flexibility in the way you pass on your n to pass on money or property while
wealth to future generations. You may you’re still alive n and or buildings
l
decide to use a trust to pass assets to n under the terms of a will
n investments
beneficiaries, particularly those who n when someone dies without leaving a
n money
aren’t immediately able to look after their will (England and Wales only) n antiques or other valuable property
own affairs. If you do use a trust to give
something away, this removes it from your What is a trust? The main types
estate provided you don’t use it or get any A trust is an obligation binding a person of private UK trust
benefit from it. But bear in mind that gifts called a trustee to deal with property in
into trust may be liable to Inheritance Tax. a particular way for the benefit of one or Bare trust
more ‘beneficiaries’. In a bare trust, the property is held in the
Trusts offer a means of holding and trustee’s name but the beneficiary can
managing money or property for Settlor take actual possession of both the income
people who may not be ready or able The settlor creates the trust and puts and trust property whenever they want.
to manage it for themselves. Used in property into it at the start, often adding The beneficiaries are named and cannot
conjunction with a will, they can also more later. The settlor says in the trust be changed.
help ensure that your assets are passed deed how the trust’s property and income
on in accordance with your wishes after should be used. You can gift assets to a child via a
you die. Here we take a look at the main bare trust while you are alive, which
types of UK family trust. Trustee will be treated as a Potentially Exempt
Trustees are the ‘legal owners’ of the Transfer (PET) until the child reaches
When writing a will, there are several trust property and must deal with it in the age 18 (the age of majority in England
kinds of trust that can be used to help way set out in the trust deed. They also and Wales), when the child can legally
minimise an Inheritance Tax liability. On administer the trust. There can be one or demand his or her share of the trust
22 March 2006 the government changed more trustees. fund from the trustees.
22 A Guide to PROTECTION Planning
23. A Guide to Protection Planning
All income arising within a bare trust in extended family) when they see fit. to each of the beneficiaries but none has
excess of £100 per annum will be treated an automatic right to either. The trust can
as belonging to the parents (assuming Where an interest in possession trust was have a widely defined class of beneficiaries,
that the gift was made by the parents). in existence before 22 March 2006, the typically the settlor’s extended family.
But providing the settlor survives seven underlying capital is treated as belonging
years from the date of placing the to the beneficiary or beneficiaries for Discretionary trusts are a useful way to pass
assets in the trust, the assets can pass Inheritance Tax purposes, for example, it on property while the settlor is still alive
Inheritance Tax free to a child at age 18. has to be included as part of their estate. and allows the settlor to keep some control
over it through the terms of the trust deed.
Life interest or interest Transfers into interest in possession
in possession trust trusts after 22 March 2006 are Discretionary trusts are often used to gift
In an interest in possession trust, the taxable as follows: assets to grandchildren, as the flexible
beneficiary has a legal right to all the nature of these trusts allows the settlor
trust’s income (after tax and expenses) n 0 per cent tax payable based on
2 to wait and see how they turn out before
but not to the property of the trust. the amount gifted into the trust at making outright gifts.
the outset, which is in excess of the
These trusts are typically used to leave prevailing nil rate band
income arising from a trust to a second n en years after the trust was created,
T
surviving spouse for the rest of their and on each subsequent ten-year
life. On their death, the trust property anniversary, a periodic charge,
reverts to other beneficiaries (known as currently 6 per cent, is applied to the
the remaindermen), who are often the portion of the trust assets that is in
children from the first marriage. excess of the prevailing nil rate band
n he value of the available nil rate band
T
You can, for example, set up an interest on each ten-year anniversary may be
in possession trust in your will. You might reduced, for instance, by the initial
then leave the income from the trust amount of any new gifts put into the
property to your spouse for life and the trust within seven years of its creation
trust property itself to your children when
your spouse dies. There is also an exit charge on any
distribution of trust assets between each
With a life interest trust, the trustees often ten-year anniversary.
have a ‘power of appointment’, which
means they can appoint capital to the Discretionary trust
beneficiaries (who can be from within a The trustees of a discretionary trust decide
widely defined class, such as the settlor’s how much income or capital, if any, to pay
A Guide to PROTECTION Planning 23
24. A Guide to Protection Planning
Discretionary trusts also allow for changes in per cent of the value of the trust assets. that trust and how it falls within the
circumstances, such as divorce, re-marriage taxing legislation. For example, a charge
and the arrival of children and stepchildren It has not been possible to create to Inheritance Tax may arise when
after the establishment of the trust. accumulation and maintenance trusts putting property into some trusts, and
since 22 March 2006 for Inheritance Tax on other chargeable occasions – for
When any discretionary trust is wound up, purposes. Instead, they are taxed for instance, when further property is added
an exit charge is payable of up to 6 per Inheritance Tax as discretionary trusts. to the trust, on distributions of capital
cent of the value of the remaining assets from the trust or on the ten-yearly
in the trust, subject to the reliefs for Mixed trust anniversary of the trust.
business and agricultural property. A mixed trust may come about when
one beneficiary of an accumulation and
Accumulation and maintenance trust reaches 18 and others
maintenance trust are still minors. Part of the trust then
An accumulation and maintenance trust becomes an interest in possession trust.
is used to provide money to look after
children during the age of minority. Any Trusts for By using trusts, you have
income that isn’t spent is added to the vulnerable persons control over what happens to
trust property, all of which later passes These are special trusts, often your estate, both immediately
to the children. discretionary trusts, arranged for a after your death and for
beneficiary who is mentally or physically generations to come.
In England and Wales the beneficiaries disabled. They do not suffer from the
Placing assets in trust also
become entitled to the trust property Inheritance Tax rules applicable to
ensures that they will pass
when they reach the age of 18. At that standard discretionary trusts and can be
smoothly to your heirs without
point the trust turns into an ‘interest used without affecting entitlement to
the delays, costs and publicity
in possession’ trust. The position state benefits; however, strict rules apply. often associated with probate.
is different in Scotland, as, once a That’s because the assets in a
beneficiary reaches the age of 16, they Tax on income trust are legally owned by the
could require the trustees to hand over from UK trusts trustees, not the settlor.
the trust property. Trusts are taxed as entities in their own
right. The beneficiaries pay tax separately Trusts are very complicated,
Accumulation and maintenance trusts on income they receive from the trust at and you may have to pay
that were already established before their usual tax rates, after allowances. Inheritance Tax and/or Capital
Gains Tax when putting property
22 March 2006, and where the child is Taxation of property
into the trust. If you want to
not entitled to access the trust property settled on trusts
create a trust you should
until an age up to 25, could be liable to How a particular type of trust is charged
seek professional advice.
an Inheritance Tax charge of up to 4.2 to tax will depend upon the nature of
24 A Guide to PROTECTION Planning
25. A Guide to Protection Planning
A Guide to PROTECTION Planning 25
26. A Guide to Protection Planning
Critical illness cover
Choosing the right cover can help ease your financial pressures
You really need to find the right peace limitations, which may differ between the conditions listed in the policy and
of mind when faced with the difficulty insurers. Critical illness policies usually only most pay out only after a ‘survival
of dealing with a critical illness. Critical pay out once, so are not a replacement for period’, which is typically 28 days. This
illness cover is a long-term insurance income. Some policies offer combined life means that if you die within 28 days of
policy designed to pay you a tax-free and critical illness cover. These pay out if meeting the definition of the critical
lump sum on the diagnosis of certain you are diagnosed with a critical illness, or illness given in the policy, the cover
life-threatening or debilitating (but not you die, whichever happens first. would not pay out.
necessarily fatal) conditions, such as
a heart attack, stroke, certain types/ If you already have an existing critical How much you pay for critical illness
stages of cancer and multiple sclerosis. illness policy, you might find that by cover will depend on a range of factors
replacing a policy you would lose some including what sort of policy you have
A more comprehensive policy will cover of the benefits if you have developed any chosen, your age, the amount you want
many more serious conditions, including illnesses since you took out the first policy. the policy to pay out and whether or
loss of sight, permanent loss of hearing It is important to seek professional advice not you smoke.
and a total and permanent disability that before considering replacing or switching
stops you from working. Some policies also your policy, as pre-existing conditions may Permanent, total disability is usually
provide cover against the loss of limbs. not be covered under a new policy. included in the policy. Some insurers
define ‘permanent total disability’ as
It’s almost impossible to predict certain Some policies allow you to increase your being unable to work as you normally
events that may occur within our lives, cover, particularly after lifestyle changes would as a result of sickness, while
so taking out critical illness cover for you such as marriage, moving home or having others see it as being unable to
and your family, or if you run a business children. If you cannot increase the cover independently perform three or more
or company, offers protection when you under your existing policy, you could ‘Activities of Daily Living’ as a result of
may need it more than anything else. But consider taking out a new policy just to sickness or accident.
not all conditions are necessarily covered, ‘top up’ your existing cover.
which is why you should always obtain Activities of daily living include:
professional advice. In May 2003, insurers A policy will provide cover only for
adopted new rules set by the Association conditions defined in the policy n athing
B
of British Insurers that tightened the document. For a condition to be covered, n ressing and undressing
D
conditions under which you could claim your condition must meet the policy n ating
E
on critical illness insurance policies. definition exactly. This can mean that n ransferring from bed to chair and
T
some conditions, such as some forms back again
If you are single with no dependants, of cancer, won’t be covered if deemed
critical illness cover can be used to pay insufficiently severe. The good news is that medical
off your mortgage, which means that you advances mean more people than ever
would have fewer bills or a lump sum to Similarly, some conditions will not be are surviving conditions that might
use if you became very unwell. And if covered if you suffer from them after have killed earlier generations. Critical
you are part of a couple, it can provide reaching a certain age, for example, many illness cover can provide cash to allow
much-needed financial support at a time policies will not cover Alzheimer’s disease you to pursue a less stressful lifestyle
of emotional stress. if diagnosed after the age of 60. while you recover from illness, or you
can use it for any other purpose. Don’t
The illnesses covered are specified in Very few policies will pay out as soon leave it to chance – make sure you’re
the policy along with any exclusions and as you receive diagnosis of any of fully covered.
26 A Guide to PROTECTION Planning
27. A Guide to Protection Planning
It’s almost impossible
to predict certain
events that may occur
within our lives, so taking
out critical illness cover
for you and your family,
or if you run a business or
company, offers protection
when you may need it
more than anything else.
A Guide to PROTECTION Planning 27
28. A Guide to Protection Planning
Glossary
The language of protection
Assured Family Income Benefit Key Person
A person or persons who are A term assurance policy that pays (Key Man) Insurance
insured under the terms of a regular benefits on death to the end Insurance against the death or
protection policy. of the plan term. disability of a person who is vital to
the profitability of a business.
Convertible Term Assurance Guaranteed Premiums
A term assurance plan that gives This means the premiums are Level Term Assurance
the owner the option to convert the guaranteed to remain the same for the A life assurance policy that pays out
policy to a whole-of-life contract or duration of the plan, unless you increase a fixed sum on the death of the life
endowment, without the need for the amount of cover via ‘indexation’. assured within the plan term. No
medical checks. surrender value is accumulated.
Income Protection
Critical Illness Cover This insurance provides you with a Life Assured
Critical Illness Cover is an insurance regular tax-free income if, by reason The person whose life is insured against
plan that pays out a guaranteed tax- of sickness or accident, you are death under the terms of a policy.
free cash sum if you’re diagnosed unable to work, resulting in a loss
as suffering from a critical illness of earnings. Income Protection is Life Insurance
covered by the plan. There is no also known as Permanent Health An insurance plan that pays out
payment if you die. You can take Insurance (PHI). a guaranteed cash sum if you die
out the plan on your own or with during the term of the plan. Some
someone else. For joint policies the Indexation term assurance plans also pay out if
cash sum is normally payable only You can arrange for your insurance you are diagnosed as suffering from a
once, on the first claim. benefit and premiums to increase terminal illness. You can take out the
annually in line with inflation or plan on your own or with someone
Decreasing Term Assurance at a fixed percentage. Premiums else. For joint life insurance policies
A term assurance plan designed to are normally increased in line with the cash sum is normally payable only
reduce its cover each year, decreasing RPI (Retail Prices Index) or NAEI once, on the first claim.
to nil at the end of term. Decreasing (National Average Earnings Index).
term assurance cover is most Long-term Care
commonly used to cover a reducing Insurable Interest Insurance to cover the cost of caring
debt or repayment mortgage. A legally recognised interest enabling for an individual who cannot perform
a person to insure another. The a number of activities of daily living,
Deferred Period insured must be financially worse off such as dressing or washing.
A period of delay prior to payment on the death of the life assured.
of benefits under a protection policy. Mortgage Protection
Periods are normally 4, 13, 26 or 52 Joint Life Second Death ‘Mortgage life assurance’ or
weeks – the longer the period the A policy that will pay out only when the ‘repayment mortgage protection’
cheaper the premium. last survivor of a joint life policy dies. is an insurance plan to cover your
28 A Guide to PROTECTION Planning
29. A Guide to Protection Planning
whole repayment mortgage, or Surrender Value an appropriate trust usually speeds
just part of it. The policy pays out The value of a life policy if it is up the payment of proceeds to your
a cash sum to meet the reducing encashed before a claim due to beneficiaries and may also assist with
liability of a repayment mortgage. death or maturity. Inheritance Tax mitigation.
You can take out the policy on
your own or with someone else. Sum Assured Waiver of Premium
For joint policies the cash sum is The benefit payable under a life If you are unable to work through
normally payable only once, on the assurance policy. illness or accident for a number of
first claim. months, this option ensures that your
Term Assurance cover continues without you having
Paid-up Plan A life assurance policy that pays out to pay the policy premiums.
A policy where contributions have a lump sum on the death of the life
ceased and any benefits accumulated assured within the term of the plan. Whole-Of-Life
are preserved. Unlike term assurance, whole-of-
Terminal Illness life policies provide life assurance
Permanent Health Insurance Some life policies include this benefit protection for the life of the assured
Cover that provides a regular income free of charge and this means the life individual(s). Cover may either be
until retirement should you be unable insurance benefit will be paid early if provided for a fixed sum assured
to work due to illness or disability. you suffer a terminal illness. on premium terms established at
Also known as Income Protection. the outset or flexible terms which
Total Permanent permit increases in cover once the
Renewable Term Assurance Disability Cover policy is in force, within certain
An ordinary term assurance policy Also known as Permanent Health pre-set limits, to reflect changing
with the option to renew the plan at Insurance or Income Protection and personal circumstances.
expiry without the need for further sometimes available as part of a life
medical evidence. assurance policy, this pays out the
benefit of a policy if you are unable
Reviewable Premiums to work due to illness or disability.
Plans with reviewable premiums
are usually cheaper initially; Trusts
however, the premiums are Many insurance companies supply
reviewed regularly and can increase trust documents when arranging
substantially. your policy. Placing your policy in
A Guide to PROTECTION Planning 29