Insurance can cover your outgoings if you are unable to work for any reason. Here we explain what the types are and what you need to know about each of them.
Once you take out any kind of loan, it’s very important that you make all the repayments in full, and on time. If you fail to do so you could lose your home if it’s a mortgage or your loan is secured on it. It could also affect your credit rating – see Loans.
Sometimes, however, the unexpected happens. For example, you might lose your job through redundancy, or find yourself unable to work due to long-term sickness. By law, an employer must pay most employees statutory sick pay for up to 28 weeks though this will probably be a lot less than full earnings. After that, you would probably have to fall back on State benefits. These are limited and means-tested, which may mean you won’t qualify. If you are self-employed, you have no employer to help, so you would have to turn to the State.
This is when insurance to protect you or your family’s income or borrowing can be useful. Listed below are some examples of products and why you might find them useful.
Critical illness (CI)
What’s it for? Pays out a lump sum if you’re diagnosed with a critical illness, such as cancer, a stroke, MS, a major organ transplant, coronary artery bypass, heart attack or kidney failure. You can use the payout to pay for medical treatment, pay off your mortgage or anything else.
What do you need to know? You need to read your insurer’s terms carefully, not just for the range of illnesses they cover but also their type. For example, while a heart attack may be covered, a cardiac condition such as angina may not. Also not all types and stages of cancer are covered.
For a claim to be successful, you normally have to survive a month following the diagnosis.
Mortgage payment protection (MPPI) – also called accident, sickness and unemployment insurance
What’s it for? A typical policy will start to pay your mortgage repayments one month after your income stops due to redundancy, accident or illness, and continues to pay for 12 months.
What do you need to know? You don’t have to have this type of cover at all (unless it’s a condition of your loan) and you certainly don’t have to buy it from your own lender, so shop around for the best deal for you.
Check if any medical problems you may have had in the past would be excluded if they cropped up again.
Payment protection insurance (PPI) – also called accident, sickness and unemployment insurance
What’s it for? To help you keep up your loan repayments, for example on a loan or credit card, in the event you can’t work because of redundancy, accident or illness. A typical policy will start to pay an agreed amount one month after your income stops due to redundancy, accident or illness, and continue to pay for a set time – usually 12 or 24 months.
What do you need to know? You don’t have to have this type of cover at all (unless it’s a condition of your loan) and you usually don’t have to buy it from your own lender, so shop around for the best deal for you. If you do buy it, look at the conditions carefully. For example, what if you wanted to cancel the cover after a few months? And if a medical problem you’ve had before crops up again, will they still pay out? Also check whether you’ll have to pay interest on your single premium. This happens where the single premium is added to your loan, which means you will be charged interest on it as well.
Life insurance
What’s it for? Pays out a lump sum if you die.
What do you need to know? With some types of cover, called Pension Term Assurance (PTA), you used to get tax relief on the premiums paid into it. This may no longer be available on policies taken out after December 2006.
Mortgage protection life cover (term insurance)
What’s it for? Pays off the mortgage loan if you die.
What do you need to know? Endowment mortgages automatically include life cover. If you have a repayment mortgage (so the amount you owe gets smaller over the years), you can buy cover that reduces as the debt reduces.
Income protection (or Permanent Health Insurance – PHI)
What’s it for? Replaces part of your income if you are unable to work for a long period of time because of illness or disability.
What do you need to know? It continues to pay out until you can return to some kind of paid work or reach retirement, whichever is sooner. PHI products have a waiting period before they will start to pay out. The longer you agree you’ll wait, the lower your premiums so it is important you find out what income you can get from your employer, and other insurance (such as mortgage payment protection) you can get in the event of illness or disability. This cover might not be available to you if you have existing health problems or a dangerous job.
