The insurance cover you shouldn't do without

Insurance is the one purchase that consumers really value when the chips are down. Research from PruProtect, a joint venture operated by Prudential and the South African Discovery group, has found that most British consumers would be reluctant to stop paying for their insurance.

Nearly three-quarters (71%) would cancel their TV subscription before they would stop paying, and nearly half (47%) would dump their mobile phone contract rather than cancel their insurance policies.

With pundits lamenting the financial fate of consumers who are drowning in debt and failing to provide for their retirement, it is good to see that many of these same consumers care about protecting their families from unforeseen emergencies.

The research found that the type of insurance that policyholders value most is life cover, favoured by 35% of people; while income protection was favoured by 20%. Only 12% of people, however, believe that maintaining critical illness cover will best serve their needs, and a mere 6% could not do without payment protection insurance.

So, how do you choose which insurance is right for you?

Protection cover for you, your mortgage, your family.

Life insurance

Life insurance pays out a lump sum if the policyholder dies. There are some types of life insurance with an investment element, but the kind of insurance of interest to most householders is the one that repays a mortgage if the insured person - usually the family breadwinner - dies before a specified date, and nothing if they do not.

If you have an interest-only mortgage you will need level term assurance, which pays out the same amount however far you are into the term. If you have a repayment mortgage, where your mortgage debt is decreasing because you are paying off what you owe bit by bit over the term, you can buy what is known as "decreasing term assurance". This is cheaper because, as the name suggests, the policy pays out a smaller sum as the term progresses.

You may pay a higher premium if you smoke, have a pre-existing medical condition or indulge in dangerous sports, or you may find cover is restricted in these circumstance.

Term assurance can provide substantial life cover when you are most likely to need it at a surprisingly affordable cost.

Income protection

Rather than paying out a lump sum, income protection provides you with a monthly tax-free replacement income if you are unable to work because you are too sick, because of an accident or you become unemployed. Policies may be offered as combined accident, sickness and unemployment, or accident and sickness only

Because income protection benefits are free of personal income tax, insurance providers will generally limit your benefit to an amount that is considerably less than your normal earnings. This will be typically up to 60% of your gross earnings, or, less usually, up to 75%, and the insurer will cap the amount you receive in any one year.

This type of insurance is sometimes called Mortgage Payment Protection Insurance, and will ensure that your mortgage repayments are paid if you are unable to pay them yourself.

If you are likely to continue to receive payments from your employer while you are sick, or you will receive a lump sum if you are made redundant, you should consider a policy with a "deferment period", as this will reduce the cost of the premiums. This is the period of time you will have to wait after losing your job before you can claim the policy benefit.

Could you pay your mortgage if you suddenly found yourself without an income through accident, sickness or unemployment? Check out mortgage protection now.

Critical illness insurance

This type of insurance pays out if the policyholder is diagnosed with any of a specified range of serious diseases, such as kidney failure, stroke and some types of cancer. The insurance has become popular, as medical progress has meant that fewer people with serious diseases die at a young age when they are providing for their families, but they may need a prolonged course of treatment, or need to make alterations to their home if the effects of an illness are permanent and leave them with restricted mobility.

You should take professional advice on which critical illness policy to buy, because cover differs between providers, and you should be careful about exclusions - make sure you opt for a policy that meets your needs, and be sure to declare any pre-existing condition, if you have one, or you may find the policy will not pay out when you need it.

Statistically you have a greater chance of suffering a serious illness before retirement than dying. Protect yourself and your loved ones with critical illness insurance.

22 January 2008 © Moneyextra.com

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