A guide to family protection

What is family protection and how can it be used to provide a safety net should the main breadwinner fall ill or die.
Key facts
  • Most families would have to cut their living costs in order to survive financially in the event of the main breadwinner falling ill or dying prematurely.
  • Family protection is all about having a financial safety net in place so that the family can remain financially secure should the unthinkable happen.
  • Family protection can cover life insurance, critical illness cover and income protection.

What is family protection?

Most families would have to cut their living costs in order to survive financially in the event of the main breadwinner falling ill or dying prematurely. Family protection can be set up to pay a lump sum or a regular income on death or diagnosis of an illness of a family member.

What does family protection cover?

Life insurance, critical illness cover and income protection all play a key part in ensuring your client’s family are covered against the financial impact of death, critical illness, or loss of income due to sickness or an accident.

  • Life insurance is a product that would pay out on early death or diagnosis of a terminal illness that meets the plan definition during the plan term. It’s essential if your client has dependents who would suffer financially if the main breadwinner died.
  • Critical illness cover pays out a sum of money that can be used to pay off the mortgage or provide financial support during a period of being unable to work.  For people who don’t have a mortgage they will still need cover to pay their rent and other utility bills. Most plans these days not only provide critical illness cover for cancer, heart attack and stroke but also provide financial assistance should a planholder be diagnosed with a less severe form of an illness such as, an early form of cancer.
  • Income protection should be taken out if cover is needed for a temporary sickness absence from work as this is not covered by a critical illness plan. Income protection pays out a monthly income when your client is unable to work through accident or illness and meets the definition of incapacity. There are several definitions of incapacity, for example being unable to perform your own occupation, or failing to do a number of defined work tasks.

Who should consider purchasing family protection?

Everyone should consider protection even those who don’t have a family or a mortgage! Unless they have substantial savings or inherited wealth most people rely on their salary to pay for everything. If that income were to stop, due to an illness or death how would they or their family continue to pay the mortgage or rent, utility bills, school fees and holidays? Taking out protection will give peace of mind that if the worst does happen they will still be able to pay the bills.

How should I raise the subject of family protection/tackle concerns/objections?

Taking out a mortgage may be the number one trigger for people to sort out their protection needs but we need to switch people on to the need for protection well before then. It’s never too early to talk about protection.  The younger your clients buy cover the cheaper it will be. If your client’s budget for protection insurance is small, you may be able to provide them with a small element of cover, for example the amount of their annual salary, which will provide a safety net for a year should they become ill and are no longer working. When their circumstances change or as their family grows they can add more cover.

 What are the pros and cons of family protection?

The pros are:

The cons are:

Families will have peace of mind that if the worst does happen they will be financially secure.

Critical illness plans and income protection pay out on the illnesses or conditions covered.  If your client’s condition doesn’t meet the definition their claim won’t be paid.

The products are flexible enough to provide cover to suit any budget and can adapt as a family’s lifestyle changes.

One of the biggest factors that puts people off buying protection is the cost. But often their perception of what the cost will be is significantly higher than the true cost and there are ways that cover can be tailored to meet a budget.

People are more likely to suffer a critical illness than to die before retirement so providing critical illness cover in addition to life insurance provides additional peace of mind.

 

Less severe critical illness cover is now being provided in recognition that there are financial needs before a condition becomes critical.  And this type of cover typically doesn’t reduce the main critical illness cover which would remain in force.

 

What are the alternatives to family protection?

Dipping into savings or relying on state benefits might seem like obvious alternatives to taking out protection but recovering from an illness can take a long time.  Sick pay from an employer could help but might only last a few weeks and not all employers provide enhanced sick pay arrangements in excess of the minimum required by law. Would statutory sick pay or benefits from the state be enough for your client and their family to live on and continue the lifestyle they enjoyed before?

How can I make sure I get the best family protection product for my client?

If the client has a set budget in mind, you want to be able to get them the best cover for the amount of money they want to spend. There are a number of expert research systems which will help in choosing the best plan for your client’s needs. 

Ask clients if they want their benefits to keep track with inflation, i.e. they increase each year.  They may want family income benefit – monthly benefit payments rather than a lump sum payment – and therefore you will be able to pick the providers that are best for this type of cover.

Finally, writing your client’s protection plan in trust means a claim will be paid to the beneficiaries more quickly and in most cases won’t be liable for inheritance tax. It will also show that you have their best interests at heart. Almost all plans that include benefits payable on death and even critical illness polices would more often than not benefit from being written in trust.

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

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This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.