Why You Don't Always Need Life Cover
Life cover is crucial for many of us, but it isn't always necessary. Find out why here.
Does everyone need life insurance? Well, if there are people in your life who depend on you financially, then you probably do.
But what if you're young (or not so young!), free and single? Can you skip buying life insurance entirely? And are there any alternative types of insurance that single people should consider?
What is life insurance?
Many of you will have taken out life insurance when you bought a home. As a result, the mortgage will be repaid if you die. And if you had taken out extra cover, there would also be some cash to provide for household costs and taking care of your children.
If you don't have any children or a partner (or at least you don't have a partner who relies on your income), then you don't really need life insurance. But that doesn't mean you should forget about protection policies. After all, if you're unable to work due to an illness or an accident, paying your mortgage and household bills could get tough.
So I'm going to look at two types of insurance policy that could help you with this problem: critical illness cover (CIC) and income protection insurance (IPI) - formerly known as Permanent Health Insurance (PHI). Let's take a look at CIC first.
Critical Illness Cover
CIC usually provides a one-off tax-free payment if you're diagnosed with an illness or condition which is specifically covered by the policy. You can only claim within the term you have chosen. The lump sum can be used as you wish. You could use it to cover everyday expenses, fund private treatment or provide an income.
CIC policies vary from one company to another. Some may cover more illnesses than others so it's very important that you read the terms and conditions before you sign up. Here are some examples of what may be covered:
Motor neurone disease
Aorta graft surgery
Coronary artery by-pass grafts
Third degree burns
Benign brain tumour
Loss of speech
Paralysis of limbs
Traumatic head injury
Loss of hands or feet
Heart valve replacement/repair
Major organ transplant
Just to reiterate, not all policies cover all these conditions. It's likely certain exclusions will apply under the policy. In other words, you may not be able to claim if an illness or condition was caused as a result of say, a criminal act or a self-inflicted injury.
It's also important you understand that an illness/condition may need to be of a certain severity for a claim to be successful. For example, not all types of cancer may be covered if the impact on your lifestyle is deemed less severe.
Income Protection Insurance
IPI works very differently to CIC. As the name suggests, it's designed to replace your income if you're unable to work as a result of any illness or accident. IPI pays out a monthly, tax-free payment until you can return to work or you retire.
Most IPI policies will provide around half to two-thirds of your gross salary as a maximum benefit. But since you receive this amount tax-free, the payout shouldn't be far off your normal take home pay.
Again the cover provided by IPI varies from company to company so be prepared to wade through the terms and conditions and look out for any exclusions or restrictions.
The premium you pay for an IPI policy will be influenced by numerous factors including the `deferment period' which can have a huge impact on cost. This means the longer you're able to defer taking benefits the lower your premiums will be. The payout can usually be deferred for one day or by one, four, eight, 13, 26 or 52 weeks. You decide how long you can wait depending on other cash reserves you may have or benefits you might be entitled to from your employer, for example.
Are you fully covered?
I have focused on the need for single people to get protection for illness, but that also extends to those of you with a partner and/or children who are financially dependent. In that case, you'll need life cover and health insurance. So, your first step should be to get a quote from The Motley Fool Insurance Service* which combines CIC and life cover into one policy.
It's probably best to choose a plan with guaranteed rather than reviewable premiums. With a guaranteed premium, you'll be paying the same amount each year for the duration of the policy. Although guaranteed premiums are more expensive to begin with, you'll always know how much you'll be paying for your cover with fixed costs. Reviewable premiums can be increased dramatically later on making your policies less affordable in the future.
In an ideal world you would all have a CIC or IPI policy whether you're single or not. But they do tend to be a more expensive than life cover. Try to accommodate it in your budget if you can, because your finances - and your lifestyle - are at risk without it.
*Unfortunately, The Motley Fool Insurance Service can only provide quotes for policies which combine critical illness cover with life cover. We are not yet able to provide quotes for critical illness only or income protection insurance.
The comments above are the opinions of the author only and do not represent advice specific to your circumstances.
This article has been approved and issued by Direct Life & Pension Ltd who are authorised and regulated by the Financial Services Authority.
The Motley Fool Insurance Service and The Motley Fool Life Insurance is a trading style of The Motley Fool Limited. The Motley Fool Life Insurance is provided and administered by Direct Life & Pension Services Limited. The Motley Fool Limited is an introducer appointed representative of Direct Life & Pension Services Limited, who are authorised and regulated by the Financial Services Authority. Registered office: Pinnacle House, A1 Barnet Way, Borehamwood, Hertfordshire WD6 2XX.