Parents are busy people and probably don’t spend too much time considering the level of financial risk in their lives. In fact, most probably think they are adequately covered because they have life insurance. The truth is there are a large number of insurance products, including many you may not have heard of. While life insurance provides a lump sum after you are gone, it does nothing to shore up or replace your income if you are unable to work. Of course, every family has different financial circumstances. But opting for the more familiar policies such as critical illness cover or life insurance could expose your family to financial hardship.
Different insurance products cover different risks. Critical illness cover tends to pay out a lump sum against a small range of serious medical conditions, many of a terminal nature. Life insurance does nothing for your family when you are alive. And mortgage protection insurance only covers mortgage payments and not income. This is an important distinction. Income protection looks after families. Payment protection looks after a loan or mortgage and is therefore deigned to protect the provider.
Determining the best way to protect your family’s income requires a proper assessment of your potential exposure to hardship. For example, a family reliant on one income rather than two to cover a large mortgage is potentially more at risk than if the family had two adults earning equal amounts. And of course your overheads are likely to include much more than mortgage payments.
The question really is, how would you pay these if the main breadwinner in your family was unable to work? You may be fit and healthy now, but the risk of being unable to work for 2 months more is very real. If you are in your 40s, for example the risk is roughly between 30% and 40% depending on whether you are male or female.
There is a form of insurance that will allow you to insure your income. It’s called income protection insurance and should not be confused with payment protection. Income protection insurance does what it says. It replaces a proportion of your income if you are unable to work. Unlike critical illness cover, income protection covers the widest possible range of mental and medical conditions and will pay out monthly until you retire or are able to work, whichever comes first.
Income protection insurance providers such as DG Mutual have pay out rates in excess of 95%. This is far higher than for other types of insurance such as the narrower critical illness cover.
As with any type of insurance, cover must be tailored to your circumstances and that of your family. The level of cover and deferred period need to dovetail with any other cover and family income. Not all providers offer the same level of cover. For example, DG Mutual is one of a limited number of providers that offers true long term over right up to retirement if required and gives the option of having no deferred period.