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Get financial protection to face a sudden loss of income | Personal Finance | Finance

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We should be prepared to face the financial consequences of ill-health

Too many tell themselves the state will provide, only to be shocked to find out how little support it offers. 

The UK has a massive protection gap as a result, estimated by insurer Swiss Re at a mind-boggling £2.4 trillion. 

Take a moment to check whether you need to plug yours. 

COVER FOR LIFE 

Life insurance pays out a tax-free lump sum if you die or are terminally ill and is bought by around one million people a year. 

Ian Sawyer, managing director at insurance brokers Assured Futures, says those with dependants and debts should have life cover, also business owners. 

Term insurance is the cheapest and simplest type of cover that pays out if you die within a set period, say, 10, 15 or 25 years. 

It has no cash-in value and once you stop paying your premiums, cover ceases. 

Sawyer says you can choose between a flat lump sum, one that rises with inflation or one that shrinks as you gradually pay off your mortgage. 

Term life cover is relatively cheap, but premiums depend on factors such as age and state of health. 

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Critical illness cover pays a tax-free lump sum if you are diagnosed with a serious illness

A 45-year-old non-smoker in good health would pay from £12 a month for £100,000 cover with insurers AIG or Vitality, according to figures from LifeSearch.co.uk, or roughly double if they smoked. 

Older people would pay more. 

You can buy via an insurance broker or direct from a reputable insurer. 

Sawyer adds: “Life cover is getting cheaper as we live longer, so check what you might pay.” 

SITUATION CRITICAL  

Critical illness cover pays a tax-free lump sum if you are diagnosed with a serious illness such as heart attack, stroke or cancer.  

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A 45-year-old non-smoker in good health would pay from £12 a month for £100,000 cover

It does not cover conditions that are not life-threatening such as stress, a broken leg or a bad back. 

Emma Thomson, head of customer care at brokers LifeSearch, says policies vary and may cover anything from a few conditions to more than 100: “Critical illness cover is often combined with life insurance to pay out on whichever happens first.” 

A healthy 45-year-old non-smoker would pay around £80 a month with insurers Aegon and Zurich, adding life cover would increase the premium, but only slightly.

Smokers and older people pay more. 

Thomson says most people buy through a broker to make sure they get the right policy: “Some are sceptical about insurers, but typically they pay out on more than 90 per cent of critical illness claims.”  

Mature man sitting on bed in hospital wardGETTY-STOCK

Income protection is particularly important for the self-employed

GET SOME PROTECTION 

Income protection pays a replacement monthly income if you are unable to work due to ill-health, and is particularly important for the self-employed. 

It should not be confused with payment protection insurance (PPI), a vastly inferior product that sparked a huge mis-selling scandal. 

Tom Conner, director at brokers Drewberry Insurance, says: “Income protection pays a tax-free monthly income that will continue until you either return to work or reach a set retirement age.” 

A healthy 45-year-old would pay around £35 a month for a policy paying £1,000 a month to age 67 through insurers Exeter and Vitality, with a six-month qualifying period on claims.  

Person signing a contractGETTY

Term life cover is relatively cheap, but premiums depend on factors such as age and state of healt

Conner says income protection is arguably the most important of all for those in work: “Unlike critical illness cover, it insures against common reasons for workplace absence such as depression and back pain.” 

Look for a policy that pays out if you cannot continue in your “own occupation”, rather than “any occupation”, and consider taking expert advice, Conner adds. 

If you have retired, cleared your debts and have no financial dependants, you may no longer need protection. 

Otherwise, you really do need to mind the gap.

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