A Guide to Protection Planning

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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.

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A Guide to Protection Planning

  1. 1. A Guide toPROTECTIONPlanningProtecting your family from financial hardship
  2. 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. 3. CONTENTSContents04 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 ones08 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 pressures16 Business protection Don’t overlook your most important 28 Glossary assets, the people who drive your A guide to the jargon of protection businessA Guide to PROTECTION Planning 03
  4. 4. A Guide to Protection PlanningLife assuranceProviding a financial safety net for your loved onesWhether you’re looking to provide a n Starting a family The cheapest, simplest form of lifefinancial safety net for your loved ones, n Becoming a stay-at-home parent assurance is term assurance. It ismoving house or a first time buyer n Having more children straightforward protection, there is nolooking to arrange your mortgage life n Moving to a bigger property investment element and it pays out ainsurance - or simply wanting to add n Salary increases lump sum if you die within a specifiedsome cover to what you’ve already n Changing your job period. There are several types ofgot - you’ll want to make sure you n Reaching retirement term assurance.choose the right type of cover. That’swhy obtaining the right advice and Relying on someone else to support you The other type of protection availableknowing which products to choose – Personal guarantee for business loans is a whole-of-life assurance policyincluding the most suitable sum designed to provide you with coverassured, 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 theLife assurance helps your dependants assured and the length of your policy policyholder’s dependants with a lumpto cope financially in the event of your (its ‘term’), plus individual lifestyle sum, usually tax-free. Depending onpremature death. When you take out factors such as your age, occupation, the individual policy, policyholders maylife assurance, you set the amount you gender, state of health and whether have to continue contributing right upwant the policy to pay out should you or not you smoke. until they die, or they may be able todie – this is called the ‘sum assured’. stop paying in once they reach a statedEven if you consider that currently If you have a spouse, partner or age, even though the cover continuesyou have sufficient life assurance, children, you should have sufficient until they die.you’ll probably need more later on protection to pay off your mortgageif your circumstances change. If you and any other liabilities. After that, Tax mattersdon’t update your policy as key events you may need life assurance to Although the proceeds from a lifehappen throughout your life, you may replace at least some of your income. assurance policy are tax-free, they couldrisk 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 simpleAs you reach different stages in so, ultimately, it’s up to you to way to avoid IHT on the proceeds is toyour life, the need for protection will decide how much money you would place your policy into an appropriateinevitably change. These are typical like to leave your family that would trust, which enables any payout to beevents when you should review your life enable them to maintain their current made directly to your dependants. Certainassurance requirements: standard of living. kinds of trust allow you to control what happens to your payout after death andBuying 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 assuranceGetting married or entering into a but within those categories there are policies that are assigned to (earmarkedcivil partnership different variations. for) your mortgage lender.04 A Guide to PROTECTION Planning
  5. 5. A Guide to Protection PlanningGenerally speaking, the amount of n hat are your family expenses and W Life assurancelife assurance you may need should how would they change if you died? helps yourprovide a lump sum that is sufficient to n ow much would the family Hremove the burden of any debts and, expenditure increase on requirements dependants to copeideally, leave enough over to invest in such as childcare if you were to die? financially in the eventorder to provide an income to support n ow much would your family income H of your prematureyour dependants for the required drop if you were to die? death. When you takeperiod of time. n ow much cover do you receive from H your employer or company pension out life assurance, youThe first consideration is to clarify what scheme and for how long? set the amount youyou want the life assurance to protect. If n hat existing policies do you have W want the policy to payyou 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 Wyour family from being financially could provide extra support to meetdisadvantaged by your premature death your family’s needs?and provide enough financial support to n ow would the return of inflation to Hmaintain their current lifestyle, there are a the economy affect the amount offew more variables you should consider. your cover over time?A Guide to PROTECTION Planning 05
  6. 6. A Guide to Protection PlanningTerm assuranceYou can’t rely on always being there for those who depend on youIt’s essential to have the right sort of Increasing term - the potential payoutlife 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 protectingdepend on you. There are various ways your initial sum assured during periods fixed term, with the sumof providing for your family in the event of rising inflation.of your premature death, but term assured payable only onassurance policies are the simplest death. You can choose how Index-linked term - some insurersand cheapest form of cover. The plans long you’re covered for, for provide you with the option for thehave no cash-in value or payments premium to be increased each year in example, 10, 15 oron 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 optionrelation to estate planning and for the to convert in the future to anotherpayment 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, withoutTerm assurance provides cover for day before it expired. This tends to be having to submit any further medicala fixed term, with the sum assured used in conjunction with an interest- evidence. This conversion optionpayable only on death. You can choose only mortgage, where the debt has allows you to adapt your plan if yourhow long you’re covered for, for to be paid off only on the last day of circumstances change. You can convertexample, 10, 15 or 20 years (the term). the mortgage term. With level term (usually within certain limits) part or allPremiums are based primarily on the assurance, premiums are fixed for the of your life assurance cover at any timeage and health of the life assured, the duration of the term and a payment during the term. And, importantly, yousum assured and the policy term. The will be made only if a death occurs won’t be asked any health questions atolder 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 fixedwill 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 theTerm assurance policies can be written to dependants up to a certain age. premiums will too. If you survive theon a single life, joint life (first or second policy term without any conversion ofdeath) or on a life-of-another basis. Decreasing term - the cash payout the plan, there will be no pay out. AsYou must have a financial interest in reduces by a fixed amount each year, this type of policy provides cover onlythe person that you are insuring when ending up at zero by the end of the in the event of death (plus the optiontaking 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 premiumsthis 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 receiveThere are several types of term assurance: run alongside repayment mortgages, any money back. where the debt reduces during theLevel term - this offers the same payout mortgage term.This type of term Renewable term - some termthroughout 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 option06 A Guide to PROTECTION Planning
  7. 7. A Guide to Protection Planningfor you to take out a further termassurance at ordinary rates withoutproviding evidence of your healthstatus, as long as the expiry date isnot beyond a set age, often 65. Eachsubsequent policy will have the sameoption, provided the expiry date is notbeyond the limit set by the life office.Family income benefit - instead ofpaying a lump sum, this offers yourdependants a regular income from thedate of your premature death until theend of the policy term. This is one ofthe least expensive forms of cover anddiffers from most other types in thatit is designed to pay the benefit as anincome rather than a lump sum. In theevent of a claim, income can be paidmonthly, quarterly or annually and undercurrent rules the income is tax-free. Toensure that income payments keep pacewith inflation, you can usually have themincreased as inflation rises. It’s alsopossible to take a cash sum instead ofthe income option upon death.Family income benefit can also includecritical illness cover, which is designedto pay the selected income if you arediagnosed with a critical illness withinthe chosen term. It is a fixed termand you won’t be able to increaseyour cover or extend the term. If youbecome ill towards the end of the term(duration of your policy), you might notbe able to obtain further cover.A Guide to PROTECTION Planning 07
  8. 8. A Guide to Protection PlanningWhole-of-lifeassuranceProviding financial protection with cover that lasts for the rest of your lifeWhole-of-life assurance policies provide If the review reveals that the same levelfinancial security for people who depend There are different of protection can’t continue, you’ll haveon you financially. As the name suggests, types of whole-of-life two choices:whole-of-life assurance helps you protect assurance policy – someyour loved ones financially with cover that n ncrease your payments I offer a set payout from thelasts for the rest of your life. This means n eep your payments the same and Kthe insurance company will have to pay outset, others are linked reduce your level of protectionout in almost every case and premiums to investments, and theare therefore higher than those charged payout will depend on Maximum coveron 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 islife assurance policy – some offer a set unit-linked policies, linked normally after ten years. The lowpayout from the outset, others are linked to funds, or with-profits premium is achieved because veryto investments, and the payout will little of your premium is kept back for policies, whichdepend on performance. Investment- investment, as most of it is used to paylinked policies are either unit-linked offer bonuses. for the life assurance.policies, linked to funds, or with-profitspolicies, 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 keepWhole-of-life assurance policies pay a investment element, your premiums are the same level of cover, as this dependslump sum to your estate when you die. usually reviewed after ten years and on how well the cash in the investmentThis could be used by your family in then every five years. reserve (underlying fund) has performed.whatever way suits them best, such asproviding for an inheritance, paying for Whole-of-life assurance policies are also Standard coverfuneral costs and even forming part of available without an investment element This cover balances the level of lifean 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 premiumrequire 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 willpaid-up at a certain age and waive normally be guaranteed for the first ten However, it relies on the value of unitspremiums 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. IncreasedWhole-of-life assurance policies can provided in the future. If the review charges or poor performance of theseem attractive because most (but not shows that the same level of protection fund could mean you’ll have to increaseall) have an investment element and can be carried on, it will be guaranteed your monthly premium to keep thetherefore a surrender value. If, however, to the next review date. same level of cover.08 A Guide to PROTECTION Planning
  9. 9. A Guide to Protection PlanningA Guide to PROTECTION Planning 09
  10. 10. A Guide to Protection PlanningIncomeprotection insuranceHow 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 undertaken very seriously, given the limited put you back to the position you were in ‘Any Occupation’ means that you havegovernment support available. How before you were unable to work. It does to be unable to perform any job, withwould you pay the bills if you were sick not allow you to make a profit out of your equivalent earnings to the job you wereor 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 yoursafety net designed to help protect you, lost, less an adjustment for state benefits cover to remain the same (levelyour family and your lifestyle in the event you can claim. This is usually translated cover) or increase in line with inflationthat 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 beWithout a regular income, you may find also likely to mean no income. However, fixed at the start of your plan and doesit a struggle financially, even if you were depending on what you do, you may not change in the future. You shouldill for only a short period, and you could have income coming in from earlier remember that this means, if inflationend up using your savings to pay the work, even if you are ill for several eventually starts to rise, that thebills. In the event that you suffered from months. The self-employed can take out buying power of your monthly incomea 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 whatare 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 incomework for more than six to nine months. of the gross profit, after deduction would go up in line with the Retail PricesIncome 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 yourrequired, up to retirement age, should incapacity. Some policies operate an When you take out cover, you usuallyyou 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 premiumsBy law, your employer must pay most The cost of your cover will depend on remain the same all the way throughoutemployees statutory sick pay for up to your gender, occupation, age, state of the term of your plan. If you have28 weeks. This will almost certainly be health and whether or not you smoke. chosen inflation-linked cover, youra lot less than your full earnings. Few premiums and cover will automaticallyemployers 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 ableunable to return to work, your employer to return to work. If a policy will pay Reviewable premiums - this meanscould even stop paying you altogether out only if a policyholder is unable to the premiums you pay can increase orand terminate your employment. After work in ‘any occupation’, it might not decrease in the future. The premiumsthat, you would probably have to rely on pay benefits for long – or indeed at all. will not typically increase or decrease forstate benefits. Some employers arrange The most comprehensive definitions are the first five years of your plan but theygroup income protection insurance for ‘Own Occupation’ or ‘Suited Occupation’. may do so at any time after that. If yourtheir employees, which can pay out an ‘Own Occupation’ means you can make premiums do go up, or down, they willincome 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. 11. A Guide to Protection PlanningHow long you have to wait after makinga claim will depend on the waitingperiod. You can usually choose frombetween 1, 2, 3, 6, 12 or 24 months. Thelonger the waiting period you choose,the lower the premium for your coverwill be, but you’ll have to wait longerafter you become unable to work beforethe payments from the policy are paidto you. Premiums must be paid for theentire term of the plan, including thewaiting period.Depending on your circumstances, itis possible that the payments from theplan may affect any state benefits due toyou. This will depend on your individualsituation and what state benefits you areclaiming or intending to claim. If you areunsure whether any state benefits youare receiving will be affected, you shouldseek professional advice. Income protection insurance aimsto put you back to theposition you were inbefore you were unableto work. It does not allowyou to make a profit outof your misfortune. Sothe maximum amount ofincome you can replacethrough insurance isbroadly the after-taxearnings you have lost, lessan adjustment for statebenefits you can claim. Thisis usually translated into amaximum of 50 per centto 65 per cent of yourbefore-tax earnings.A Guide to PROTECTION Planning 11
  12. 12. A Guide to Protection PlanningLong-termcare fundingKeeping pace with the growing size of an ageing populationThe funding of long-term care remains n ll those who enter adulthood with A care costs or to take a charge against aone of the biggest public policy a care and support need should property to be repaid on the eventual salechallenges facing the government. As the be eligible for free state support of the home. This could result in very littlebaby-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 elderlynext twenty years just to keep pace with We may not like to think about it, but a who require care over the longer termthe 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 theIn 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 carecoalition to review the funding system of elderly person needs to go into residential provision may be required if you becomecare and support in England. Chaired by care is often a huge strain on family ill or suffer a disability that makes youAndrew Dilnot, it presented its findings to members. Illness or infirmity may have unable to carry out your usual activities ofthe government in its report ‘Fairer Care forced a sudden change in circumstances daily living, with the probability that thisFunding’, 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 ifreport 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 elderlyn 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, includingn 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 ton 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 have12 A Guide to PROTECTION Planning
  13. 13. A Guide to Protection PlanningA Guide to PROTECTION Planning 13
  14. 14. A Guide to Protection Planninghoped the National Health Service (NHS) powers that local authorities have to Contribution, paid in England. This iswould look after them. But the NHS no include in the means testing assessment paid direct to the home and offsets thelonger 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’. Thisold age. Instead you may be forced to occurs when a resident transfers an asset In Scotland, those who need nursing carebuy ‘insurance’ to pay out if nursing or out of their possession in order to achieve will also be paid a contribution towardsresidential 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 inSince the Community Care Act, that task Scotland still have to contribute substantialhas 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’. Ifthe Nursing Care Service Component of a the value of your assets, excluding your Many families may still have to pay theperson’s long-term care service needs. All property, is less than £23,250, you should majority of the care costs. There areother costs and services associated with not have to pay for care for the first 12 a variety of options to consider, andlong-term care are the care recipient’s weeks. Even if your assets are more than professional advice should always beresponsibility unless they qualify for local this initially but are then used up paying taken to evaluate which best suits yourauthority 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 theybeen available. drop below the £23,250 limit. A deferred option scheme - if your other assets are below the means test limit, youAnyone currently with assets of more It is important not to fall into the trap of can ask the local authority to pay carethan £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. Thistheir care needs. In most cases, the value right to obtain assets that have been potentially allows your estate to benefit fromof any property owned will be included deliberately disposed of to avoid paying future property price rises, although in thewithin this sum. fees. However, the ‘tenants-in-common’ current climate this may not be so relevant. ownership does not fall under these rulesHowever, there are certain circumstances because the gift is made only on death. A care fees annuity - from the proceedsin which the home is excluded. And those of the sale of the home, you can buywith the foresight to plan in advance may If your care needs are overwhelmingly an annuity to provide a guaranteedwant to make sure they can take advantage medical and are deemed ‘complex and income. This means that the price of careof this, particularly if their remaining assets unstable’, you may qualify for NHS-funded is capped and protects the remainingare 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 couldA 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 thoseThis rule extends to other relatives aged who do are reassessed regularly. Investment options - many people60 or over who live in the property. So if choose to sell the home and invest thea daughter, niece or brother has moved If their condition stabilises, their care proceeds, using the income generatedin as a carer, this could help reduce future costs will revert to local authority control, to help pay care fees. Alternatively, thecare costs. More importantly, many which means patients will be assessed property may be rented, with the rentalcouples don’t realise that they may be for their ability to pay. But if a relative’s income going towards care. But thisable to take the home out of the care condition worsens, you can ask for them means that the family has to maintainequation 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 TrustsMost couples buying a property do so local social services. You and your spouse or civil partneras ‘joint tenants’. This ensures that on should each make a provision in yourthe 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 isthis is done, and half the home is passed receive the correct benefits. The main placed in trust for your children or otheron to the children on the death of the one is Attendance Allowance. It is beneficiaries instead of passing directly tofirst 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 yourhome may be disregarded at a later stage level of need. If you are receiving care A trust keeps any designated propertyif the surviving spouse needs nursing care. in a nursing home, you should also be owned by the deceased away fromHowever, you need to understand the eligible for the Registered Nursing Care the council’s reach. At the same time14 A Guide to PROTECTION Planning
  15. 15. A Guide to Protection Planningit allows the surviving spouse or civilpartner to continue benefiting from the We may not like to think about it, but a growingassets, which may include the family number of us will need long-term care whenhome. On the death of the remaining we’re older. If you’ve got elderly parents you maymember of the couple, the assets owned need to pay all or part of their care costs. The timeby the trust, together with whatever isleft of the assets of the second spouse when an elderly person needs to go into residentialor civil partner, can be given to the care is often a huge strain on family members. Illnesssurviving family. or infirmity may have forced a sudden change in circumstances and time may be short.The majority of people own their homesjointly, which means that, on first death,the survivor would then own 100 percent of the full property value. Bychanging the way you own your home towhat is known as ‘tenants-in-common’,combined with the appropriate trustplanning, this could effectively ensurethat your property is fully protectedshould either of you enter into care.In addition, by changing the way yourassets are invested and held, this couldensure that your cash or liquid assetsare fully protected from future long-term care costs.A gift-and-loan trust can be used to fundlong-term care, with the added benefit ofreducing 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 bylaw but you can have the loan repaid,typically at 5 per cent annually, whichcan then be used to pay for care fees.The trustees can invest the capital, andthe aim is that it grows in value outsideof your estate.Equity releaseEven with recent falls in property prices,many elderly people may have significantequity in their homes. Equity-releaseschemes are loans against the value oftheir home, with interest deferred untilthe property is sold, normally on death.Most lifetime mortgage schemes allowyou to borrow between 20 per cent and45 per cent of the property’s value. Unlikeselling the property to raise funds forcare-home fees, you will still benefit if thehousing market gains value and you canalso keep your house.A Guide to PROTECTION Planning 15
  16. 16. A Guide to Protection PlanningBusiness protectionDon’t overlook your most important assets,the people who drive your businessEvery business has key people who If a shareholding director or partner were a ‘cross-option’ agreement or a ‘doubleare 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 onlycompany property, equipment and fixed would you lose their experience and These are essential areas for partnershipsassets. However, they continually overlook expertise, but consider, too, what might or directors of private limited companiestheir 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 yourKey person insurance is designed to business. Or you may discover that you Key person insurance - compensates yourcompensate a business for the financial can’t afford to buy the shareholding. It’s business up to a pre-agreed limit for theloss brought about by the death or even possible that the person to whom the loss or unavoidable absence of crucialcritical 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 businessvaluable cash injection to the business to the company. depends on a few employees.aid a potential loss of turnover and providefunds 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 businessShare and partnership protection that does not create a legally binding owner in the event of a serious illness, suchprovides 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 partiesbusiness, supported by life assurance an option to buy or sell, i.e. the survivor Income protection insurance - protectsto ensure that there are sufficient has the option to buy the shares of the individuals by paying their salaries whilefunds 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 optioncontrol of the business is retained by to sell those shares. Private health insurance - funds privatethe remaining partners or directors but healthcare for specific employees. As wellthe 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 morebeneficiaries in the most tax-efficient there is no binding contract beforehand. quickly after an illness by paying formanner possible. This type of agreement is generally called rehabilitation treatment.16 A Guide to PROTECTION Planning
  17. 17. A Guide to Protection PlanningFinancial protectionfor you and your familyWith the abundance of choice, we can help you make the right decisionsWith so many different protection options available, making We can make sure that you are able to take the rightthe right decision to protect your personal and financial decisions to deliver peace of mind for you and your family insituation can seem overwhelming. There is a plethora of the event of death, if you are too ill to work, require care or ifprotection solutions which could help ensure that a lump you are diagnosed with a critical illness.sum, or a replacement income, becomes available to you inthe 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 specificrequirements are fully covered.A Guide to PROTECTION Planning 17
  18. 18. A Guide to Protection PlanningMaking a willPlanning ahead can give you the peace of mind that your lovedones can cope financially without youNo one likes to think about it but death is n f you’re divorced, you can decide whether i If you’re married orthe one certainty that we all face. Planning to leave anything to your former partner in a civil partnershipahead can give you the peace of mind n ou can make sure you don’t pay more y and there are no childrenthat your loved ones can cope financially Inheritance Tax than necessary The husband, wife or civil partner won’twithout you and, at a difficult time, helps automatically get everything, althoughremove 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 pPlanning your finances in advance should articles and cars, but nothing used forhelp you to ensure that, when you die, n ow much money and what property h business purposeseverything 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 thanin 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 wIf 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 willfor sharing out your estate called the (your executor)  be shared by the following:Law of Intestacy, which could meanyour money going to family members Passing on your estate SUrviving parentswho may not need it, or your unmarried An executor is the person responsible for n f there are no surviving parents, any ipartner or a partner with whom you passing on your estate. You can appoint an brothers and sisters (who shared theare 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 wasIf 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, ito pay, because they are classed as an to keep it in a safe place and tell your the husband, wife or registered civilexempt beneficiary. Or you may decide to executor, close friend or relative where it is. partner will get everythinguse your tax-free allowance to give someof your estate to someone else or to a It is advisable to review your will every five If you’re married or infamily trust. Scottish law on inheritance years and after any major change in your a civil partnership anddiffers 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’tGood reasons to make a will house. Any change must be by ‘codicil’ (an automatically get everything, althoughA 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 preasons 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 purposesn 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. 19. A Guide to Protection PlanningThe rest of the estate will be shared by n if there are no brothers or sisters, then If you feel that you have not receivedthe 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 aIf you are partners but was still alive) claim under the Inheritance (Provisionaren’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. ToIf you aren’t married or registered civil n f there are no grandparents, then to aunts i make a claim you must have a particularpartners, 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 diedIf they haven’t provided for you in some while the deceased was still alive) Bear in mind that if you were livingother way, your only option is to make a n to the Crown if there are none of with the deceased as a partner butclaim 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 theIf there is no surviving you don’t have a will. This could mean deceased.’ This can be difficult to provespouse/civil partner extra distress for your relatives and if you’ve both contributed to your lifeThe 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 ofn 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 aliveA Guide to PROTECTION Planning 19
  20. 20. A Guide to Protection PlanningWealth protectionWithout 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 whetherit is essential to have provisions in place you receive an income. they were made while both partnersafter you’re gone. The easiest way to were still alive or left to the survivor onprevent unnecessary tax payments such as Against this total value is set everything the death of the first. Tax will be dueInheritance Tax is to organise your tax affairs that you owed, such as any outstanding eventually when the surviving spouseby obtaining professional advice and having mortgages or loans, unpaid bills and costs or civil partner dies if the value of theira valid will in place to ensure that your incurred during your lifetime for which estate is more than the combined taxlegacy 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 liabilityEffective Inheritance Tax planning Any amount of money given away to Inheritance Tax and the giver dies lesscould save your beneficiaries thousands outright to an individual is not counted than seven years later, a special reliefof 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 taxestate. 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 bea certain amount. It’s also sometimes Money put into a ‘bare’ trust (a trust paid within six months from the end ofpayable on assets you may have given away where the beneficiary is entitled to the month in which the death occurs. Ifduring your lifetime, including property, the trust fund at age 18) counts as a not, interest is charged on the unpaidpossessions, 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 deferredInheritance 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 allfor married couples and registered civil the instalments have been paid, thepartnerships) for the current 2011/12 However, gifts to most other types of outstanding amount must be paid. Thetax year, at a rate of 40 per cent. If the trust will be treated as chargeable lifetime Inheritance Tax threshold in force atvalue of your estate, including your home transfers. Chargeable lifetime transfers the time of death is used to calculateand 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 perthreshold, tax will be due on the balance cent, with a further 20 per cent payable Inheritance Tax can be a complicatedat 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; manyWithout proper planning, many people people could end up leaving a huge taxcould end up leaving a substantial tax Some cash gifts are exempt from tax liability on their death, considerablyliability on their death, considerably regardless of the seven-year rule. Regular reducing the value of the estate passingreducing the value of the estate passing gifts from after-tax income, such as a to chosen beneficiaries. So withoutto 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 liabilityYour estate includes everything owned in have sufficient income to maintain your when you die. To ensure that your familyyour 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 mostsome benefit (such as a home given to a Any gifts between husbands and financial planning, early considerationson 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. 21. A Guide to Protection PlanningA Guide to PROTECTION Planning 21
  22. 22. A Guide to Protection PlanningTrustarrangementsDo you have control over what happens to your estate, bothimmediately after your death and for generations to come?Following the changes introduced by the some of the rules regarding trusts and BeneficiaryFinance Act 2006 trusts still remain an introduced some transitional rules for This is anyone who benefits fromimportant estate planning mechanism. trusts set up before this date. the property held in the trust. TheA trust arrangement can ensure that trust deed may name the beneficiariesyour wealth is properly managed and A trust might be created in various individually or define a class ofdistributed after your death, so that it circumstances, for example: beneficiary, such as the settlor’s family.provides for the people who depend onyou and is enjoyed by your heirs in the n when someone is too young to handle Trust propertyway 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 beA 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 ldecide to use a trust to pass assets to n under the terms of a will n investmentsbeneficiaries, particularly those who n when someone dies without leaving a n moneyaren’t immediately able to look after their will (England and Wales only) n antiques or other valuable propertyown affairs. If you do use a trust to givesomething away, this removes it from your What is a trust? The main typesestate provided you don’t use it or get any A trust is an obligation binding a person of private UK trustbenefit from it. But bear in mind that gifts called a trustee to deal with property ininto 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 theTrusts offer a means of holding and   trustee’s name but the beneficiary canmanaging money or property for Settlor take actual possession of both the incomepeople 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 cannotconjunction 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 incomeon in accordance with your wishes after should be used. You can gift assets to a child via ayou die. Here we take a look at the main bare trust while you are alive, whichtypes of UK family trust. Trustee will be treated as a Potentially Exempt Trustees are the ‘legal owners’ of the Transfer (PET) until the child reachesWhen writing a will, there are several trust property and must deal with it in the age 18 (the age of majority in Englandkinds of trust that can be used to help way set out in the trust deed. They also and Wales), when the child can legallyminimise an Inheritance Tax liability. On administer the trust. There can be one or demand his or her share of the trust22 March 2006 the government changed more trustees.  fund from the trustees.22 A Guide to PROTECTION Planning
  23. 23. A Guide to Protection PlanningAll income arising within a bare trust in extended family) when they see fit. to each of the beneficiaries but none hasexcess of £100 per annum will be treated an automatic right to either. The trust canas 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 belongingyears from the date of placing the to the beneficiary or beneficiaries for Discretionary trusts are a useful way to passassets in the trust, the assets can pass Inheritance Tax purposes, for example, it on property while the settlor is still aliveInheritance 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 possessionin possession trust trusts after 22 March 2006 are Discretionary trusts are often used to giftIn an interest in possession trust, the taxable as follows: assets to grandchildren, as the flexiblebeneficiary has a legal right to all the nature of these trusts allows the settlortrust’s income (after tax and expenses) n 0 per cent tax payable based on 2 to wait and see how they turn out beforebut not to the property of the trust. the amount gifted into the trust at making outright gifts. the outset, which is in excess of theThese trusts are typically used to leave prevailing nil rate bandincome arising from a trust to a second n en years after the trust was created, Tsurviving spouse for the rest of their and on each subsequent ten-yearlife. On their death, the trust property anniversary, a periodic charge,reverts to other beneficiaries (known as currently 6 per cent, is applied to thethe remaindermen), who are often the portion of the trust assets that is inchildren from the first marriage. excess of the prevailing nil rate band n he value of the available nil rate band TYou can, for example, set up an interest on each ten-year anniversary may bein possession trust in your will. You might reduced, for instance, by the initialthen leave the income from the trust amount of any new gifts put into theproperty to your spouse for life and the trust within seven years of its creationtrust property itself to your children whenyour spouse dies. There is also an exit charge on any distribution of trust assets between eachWith a life interest trust, the trustees often ten-year anniversary.have a ‘power of appointment’, whichmeans they can appoint capital to the Discretionary trustbeneficiaries (who can be from within a The trustees of a discretionary trust decidewidely defined class, such as the settlor’s how much income or capital, if any, to payA Guide to PROTECTION Planning 23
  24. 24. A Guide to Protection PlanningDiscretionary trusts also allow for changes in per cent of the value of the trust assets. that trust and how it falls within thecircumstances, such as divorce, re-marriage taxing legislation. For example, a chargeand the arrival of children and stepchildren It has not been possible to create to Inheritance Tax may arise whenafter 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 – forWhen any discretionary trust is wound up, purposes. Instead, they are taxed for instance, when further property is addedan exit charge is payable of up to 6 per Inheritance Tax as discretionary trusts. to the trust, on distributions of capitalcent of the value of the remaining assets from the trust or on the ten-yearlyin 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 andAccumulation and maintenance trust reaches 18 and othersmaintenance trust are still minors. Part of the trust thenAn accumulation and maintenance trust becomes an interest in possession trust.is used to provide money to look afterchildren during the age of minority. Any Trusts for By using trusts, you haveincome that isn’t spent is added to the vulnerable persons control over what happens totrust property, all of which later passes These are special trusts, often your estate, both immediatelyto 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 alsobecome entitled to the trust property Inheritance Tax rules applicable to ensures that they will passwhen they reach the age of 18. At that standard discretionary trusts and can be smoothly to your heirs withoutpoint the trust turns into an ‘interest used without affecting entitlement to the delays, costs and publicityin 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 abeneficiary reaches the age of 16, they Tax on income trust are legally owned by thecould 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 paythat were already established before their usual tax rates, after allowances. Inheritance Tax and/or Capital Gains Tax when putting property22 March 2006, and where the child is Taxation of property into the trust. If you want tonot entitled to access the trust property settled on trusts create a trust you shoulduntil 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 of24 A Guide to PROTECTION Planning
  25. 25. A Guide to Protection PlanningA Guide to PROTECTION Planning 25
  26. 26. A Guide to Protection PlanningCritical illness coverChoosing the right cover can help ease your financial pressuresYou really need to find the right peace limitations, which may differ between the conditions listed in the policy andof mind when faced with the difficulty insurers. Critical illness policies usually only most pay out only after a ‘survivalof dealing with a critical illness. Critical pay out once, so are not a replacement for period’, which is typically 28 days. Thisillness cover is a long-term insurance income. Some policies offer combined life means that if you die within 28 days ofpolicy designed to pay you a tax-free and critical illness cover. These pay out if meeting the definition of the criticallump sum on the diagnosis of certain you are diagnosed with a critical illness, or illness given in the policy, the coverlife-threatening or debilitating (but not you die, whichever happens first. would not pay out.necessarily fatal) conditions, such asa heart attack, stroke, certain types/ If you already have an existing critical How much you pay for critical illnessstages 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 haveA more comprehensive policy will cover of the benefits if you have developed any chosen, your age, the amount you wantmany more serious conditions, including illnesses since you took out the first policy. the policy to pay out and whether orloss 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 switchingstops you from working. Some policies also your policy, as pre-existing conditions may Permanent, total disability is usuallyprovide cover against the loss of limbs. not be covered under a new policy. included in the policy. Some insurers define ‘permanent total disability’ asIt’s almost impossible to predict certain Some policies allow you to increase your being unable to work as you normallyevents that may occur within our lives, cover, particularly after lifestyle changes would as a result of sickness, whileso taking out critical illness cover for you such as marriage, moving home or having others see it as being unable toand your family, or if you run a business children. If you cannot increase the cover independently perform three or moreor company, offers protection when you under your existing policy, you could ‘Activities of Daily Living’ as a result ofmay 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 foradopted new rules set by the Association conditions defined in the policy n athing Bof British Insurers that tightened the document. For a condition to be covered, n ressing and undressing Dconditions under which you could claim your condition must meet the policy n ating Eon 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 againIf you are single with no dependants, of cancer, won’t be covered if deemedcritical illness cover can be used to pay insufficiently severe. The good news is that medicaloff your mortgage, which means that you advances mean more people than everwould have fewer bills or a lump sum to Similarly, some conditions will not be are surviving conditions that mightuse if you became very unwell. And if covered if you suffer from them after have killed earlier generations. Criticalyou are part of a couple, it can provide reaching a certain age, for example, many illness cover can provide cash to allowmuch-needed financial support at a time policies will not cover Alzheimer’s disease you to pursue a less stressful lifestyleof emotional stress. if diagnosed after the age of 60. while you recover from illness, or you can use it for any other purpose. Don’tThe illnesses covered are specified in Very few policies will pay out as soon leave it to chance – make sure you’rethe policy along with any exclusions and as you receive diagnosis of any of fully covered.26 A Guide to PROTECTION Planning
  27. 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. 28. A Guide to Protection PlanningGlossaryThe language of protectionAssured Family Income Benefit Key PersonA person or persons who are A term assurance policy that pays (Key Man) Insuranceinsured under the terms of a regular benefits on death to the end Insurance against the death orprotection policy. of the plan term. disability of a person who is vital to the profitability of a business.Convertible Term Assurance Guaranteed PremiumsA term assurance plan that gives This means the premiums are Level Term Assurancethe owner the option to convert the guaranteed to remain the same for the A life assurance policy that pays outpolicy to a whole-of-life contract or duration of the plan, unless you increase a fixed sum on the death of the lifeendowment, without the need for the amount of cover via ‘indexation’. assured within the plan term. Nomedical checks. surrender value is accumulated. Income ProtectionCritical Illness Cover This insurance provides you with a Life AssuredCritical Illness Cover is an insurance regular tax-free income if, by reason The person whose life is insured againstplan 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 lossas suffering from a critical illness of earnings. Income Protection is Life Insurancecovered by the plan. There is no also known as Permanent Health An insurance plan that pays outpayment if you die. You can take Insurance (PHI). a guaranteed cash sum if you dieout the plan on your own or with during the term of the plan. Somesomeone else. For joint policies the Indexation term assurance plans also pay out ifcash sum is normally payable only You can arrange for your insurance you are diagnosed as suffering from aonce, 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 someoneDecreasing Term Assurance at a fixed percentage. Premiums else. For joint life insurance policiesA term assurance plan designed to are normally increased in line with the cash sum is normally payable onlyreduce 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 Carecommonly used to cover a reducing Insurable Interest Insurance to cover the cost of caringdebt 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 ProtectionPeriods are normally 4, 13, 26 or 52 Joint Life Second Death ‘Mortgage life assurance’ orweeks – 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 your28 A Guide to PROTECTION Planning

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