Insurance is a crucial part of financial planning. This should be taken seriously. Having the right insurance could get you out of a hole at a time of desperation. But which insurance is non-essential, and which should you buy if you don’t already have cover?
If you are single and have no dependents
You may be tempted not to think about insurance at all with no one to think about but yourself. Two insurances to consider however would be income protection and critical illness cover.
Income protection would ensure that your income continued if you fell ill or had an accident and were unable to work. The policy would pay you a tax-free income for a specific period or until you were able to return to work. This could prove vital, especially if you had significant financial commitments such as a mortgage to consider. Worth contemplating, especially if you are self-employed.
Critical illness cover would pay you a tax-free lump sum if you were diagnosed with a critical illness such as cancer or heart attack. This payment could be viewed as a compensation payment for the bad news of such a diagnosis. You pay a monthly premium which is based on your age and health at time of application and premiums stay the same for the life of the policy if you go for guaranteed cover.
If you have a family
If members of your family are dependent on your income, life insurance is a must. Life insurance pays out a tax-free lump sum or income on your death. As it is underwritten on age and health at time of application so there should be an advantage in taking it out as early as possible when you are young and healthy. Try this life cover calculator
When taking out a mortgage
Mortgage protection would pay off your mortgage or loan if you were to die. Typically, the insured amount would be the amount borrowed on the mortgage. The insurance cover would decrease in line with the mortgage as repayments reduced the balance.
Payment protection insurance (PPI) is quite different and would cover your mortgage repayments if you were unable to work. This insurance earned a bad reputation a few years back when banks automatically included it when applying for loans or mortgages for customers without them being aware! This doesn’t necessarily mean PPI is bad.
In later life
Whole of life insurance could be set up to pay off your inheritance tax bill when you die. The policy holder pays premiums for the rest of their lives. On their death, the insurance policy’s proceeds would be used to pay off any inheritance tax bill. The policy would be written in trust to ensure it did not form part of the estate thereby increasing the inheritance tax liability. This area of financial advice can be complex so seek independent financial advice before taking the plunge.
What you don’t need
You can insure almost anything or any eventuality nowadays. Deciding what you need or don’t need is always subjective and can be a challenge. Before taking out any insurance, consider the risk. Think whether you would likely make a successful claim on the insurance policy and weigh up the cost vs the potential benefit. If you’re a fan of the NHS for example and unlikely to ever go private, taking out private medical insurance may be a waste of money. Our advice? Seek advice from your independent financial adviser.