There are a number of types of protection insurance including:
- Long-term care
- Income protection
- Critical illness
- Creditor insurance
Each offers distinctly different cover and is usually issued as a separate stand-alone policy.
Typical cover provided under Protection Insurance
Long term care
Long term care insurance provides financial support if care is needed by the insured. It can cover the cost of assistance for those who need help to perform the basic activities of daily life such as getting out of bed, dressing, washing and going to the toilet (called Activities of Daily Living).
The care needed may be provided in the insured’s own home or in residential or nursing homes.
There are several types of long term care plans, including:
- immediate needs annuities, which pay a guaranteed income for life to help cover the cost of care fees in exchange for a one-off lump sum payment, if the insured needs immediate care
- pre-funded care plans, which give the insured the option of insuring future care needs before they develop (these plans are no longer available to purchase)
- Enhanced annuities, which use the insured’s pension to buy an enhanced annuity if the insured has a health problem, a long-term illness, is overweight or smokes. The annuity provider uses full medical underwriting to get a more accurate individual price. People with medical conditions including Parkinson’s disease and multiple sclerosis, or those who have had a major organ transplant are likely to be eligible for an enhanced annuity
- Equity release plans, which give the insured the ability to get a cash lump sum as a loan secured on their home. They can be used to fund a care plan now, or in the near future
Income protection
Income protection policies are designed to replace lost income for an individual who, due to illness or accident, is unable to work for more than a specified time.
There are 2 types of policy:
- short-term income protection policies are designed to provide payments should the insured be unable to work for a set period of time; usually between 6 and 12 months
- long-term income protection insurance can provide cover if the insured becomes so ill that they are unlikely to be able to work again
The key features of cover include:
- payments are made until the insured can start working again, or in the case of long term policies, until retirement, death or the end of the policy term – whichever is sooner
- Cover is subject to a waiting period before the payments can start. This is usually set so that payments start after sick pay ends, or after any other insurance stops covering the insured
- The maximum amount of income that can be covered is around 70% of gross monthly earnings. Any payments are normally tax free
- most illnesses that would leave the insured unable to work, either in the short or long term, are covered
- the insured can claim as many times as is needed whilst the policy lasts
Critical illness
Critical illness cover is offered as a stand-alone policy, but can also be incorporated into a whole life, term or endowment policy.
It provides a lump sum payment in the event of the insured being diagnosed with one or more of a defined range if serious illnesses. The illness covered are specified in the policy wording, but typically include:
- heart attack
- stroke
- cancer
- surgery for coronary artery disease
- major organ transplant
- kidney failure
Other conditions may also be covered such as multiple sclerosis, paralysis and blindness.
There are two types of critical illness policy:
- Fixed policies, where the premium paid is the same amount every month. Whilst this can be more expensive in the short-term, it allows the insured to know what they’ll be paying in future
- Reviewable policies where the monthly payments are reviewed after a period of time; typically every five years. For these types of policy initial premiums tend to be lower, but can rise over time taking in account the insured’s age and medical advances
Other features of critical illness cover include:
- payment is made regardless of whether the illness prevents the insured from working
- the policy wording will specify how serious a condition needs to be for payment to be made
- some insurers will make partial payments for less severe conditions
- lump sum payments are tax free
- policies only pay out once and then come to an end
Creditor
This provides cover for the regular repayments due under, for example, a mortgage, bank loan or credit card, in the event of unemployment, accident or sickness. It is also known as payment protection, mortgage protection and consumer credit insurance.
There are many types of creditor insurance and cover can vary significantly between policies.
Cover is provided under two main sections:
- Unemployment and accident and sickness cover, which pays a monthly benefit if the insured becomes unemployed or is prevented from working due to accident or illness. There is usually a waiting period, which may take the form of either an excess or a franchise depending on the insurer. In the event of the permanent total disablement of the insured, the policy will pay the outstanding balance of the loan or credit card
- Life cover. In the event of the insured’s death the policy will pay the outstanding balance of the loan or credit card at the date of death.
Limits apply to each section of cover.