Got a life? Get a life policy!

Have you got life insurance; if so, is it enough? Have you given much thought to reviewing your circumstances and/or assessing the financial benefits of other forms of protection such as critical illness and income replacement cover?

We all die, sooner or later, and the unlucky ones get sick or disabled, unable to work, before they reach the terminus. Unless you want to leave financial chaos in your wake or have absolutely no dependants or commitments, then you need some kind of financial protection and that usually means life insurance.

The degree or amount of life insurance you need naturally depends on your stage in life. Also, of course, it is sensible to plan and implement such protection whilst in good health with a relaxed, analytical mind (not when you've just fallen out of a mile-high 747 without a parachute).

It has often been argued that the term 'death insurance' is more apposite, would focus minds on the problem (after all, 'critical illness' cover gets right to the point) and heighten awareness of the need.

Even so, according to the Association of British Insurers, the UK life insurance market is the largest in Europe, so we must be doing something right. Statistics for 2003 (the most recent available) show that life insurance premiums (for both protection and savings-related products) totalled £29 billion. Income protection and critical illness cover produced a further £2.5 billion. Life policies paid out £37 billion in the same year.

Per working day the UK insurance industry pays out almost £222 million in life insurance and pensions benefits, compared to £74 million in general insurance claims.

Convinced? Perhaps not; research by Abbey has indicated, for instance, that 46% of mortgage borrowers do not have life insurance at all. So goodbye home, hello now-impoverished, destitute family, your chief source of income has just had a fatal heart attack. Or has a kind benefactor paid off the mortgage?

Tailor your insurance to your needs

A young, single professional probably doesn't need life insurance, other than to indemnify a mortgage commitment. But critical illness cover or income protection is eminently sensible.

The former pays out on diagnosis of debilitating medical condition, the most common being heart attack, cancer, stroke, coronary artery disease surgery and multiple sclerosis. Note that almost 50% of female claimants and 35% of male claimants are aged under 40, with cancer and heart attack being the respective leading conditions.

Income protection is a good alternative (better still as a combination) but doesn't pay out a lump sum; it provides ongoing payments to replace earned income if you are unable to work. How much you get depends on the contract entered into; age, sex, occupation and deferment are among the determining factors. However, it usually pays out in cases of back trouble, a condition not normally covered by critical illness cover.

If you have dependants you care for, you should have life insurance protection. Theres no argument, unless you've already made and distributed your millions amongst the family. Ideally you need a sum assured at least double that required to pay off the mortgage.

Review your protection portfolio on a regular basis (children leaving home, early retirement etc) or immediately if there's a sudden change in circumstances such as job loss or divorce.

Whatever life insurance you choose it should be written 'in trust'; the more straightforward own life basis means the sum assured will form part of your estate, be subject to grant of probate before reaching intended beneficiaries and could exacerbate any inheritance tax issues.

19 May 2005 © Moneyextra.com

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