Life assurance and critical illness cover (CIC) can provide many benefits. In the first of a two-part series, Richard Taylor and Rupert Connor, Chartered Financial Advisors, Acuma Wealth Management, explain exactly what life assurance is, and why you should consider investing in it in order to protect yourself, your family and your wealth.
I’m afraid this isn’t a particularly pleasant topic as it involves considering your own mortality, but it is a very important one. As a financial planner, it is my duty to first deal with the unpleasant subjects or the “what ifs” – what if you die, what if you need medical attention, what if you become critically ill and so on. More specifically, what are the consequences of such events and what can I do to make such catastrophes survivable for you or those left behind.
If we don’t worry about these things, and statistics show that most people left to their own devices don’t, who will? Unfortunately, these things do happen and they often occur without any prior warning.
Only once we have ensured that our clients are protected and covered in the event of such catastrophes can we move on to the more “enjoyable” aspects of financial planning: namely retirement and lifestyle planning, to ensure people live the lives they want to lead. However, it is important to note that any such plans can be instantly derailed if a catastrophe occurs for which you are unprepared for. Only once these foundations are in place can you really start to put in place plans for your future.
Introduction to life assurance
Have you ever wondered why it is called assurance as opposed to insurance? It is because you definitely will die one day. You take out insurance to protect yourself against events which might happen, whereas assurance provides protection against certainties.
And this is one of the peculiarities with life assurance – every single one of us knows for certain that one day we will die, it is just a question of when and how. If this happens when most of us would like and expect (well into our old age and retirement), there are unlikely to be any significant repercussions. However, should this occur unexpectedly and without warning, at certain stages in your life the repercussions can be devastating for those left behind.
And yet statistically, we are far more likely to take out insurance to protect our TV than our family’s quality of life.
Just in case life does throw you (or more importantly your family) a curve ball, life assurance can significantly ease the burden.
Different types and uses
There are two types of life cover, Term and Whole of Life (WoL), which pay out on the policy holder’s death, and there is Critical Illness Cover (CIC), which pays out in the event of the policy holder being diagnosed with certain conditions.
- Term: Term covers exactly what it says on the tin. It covers you for a certain period of time and does nothing but pay out a lump sum on death during that period. Term assurance is frequently used as low-cost cover to protect specific liabilities, such as mortgages and loans, and as a cost-effective means to protect a family’s future lifestyle should the main breadwinner die.
- Whole of Life: These plans cover the life assured until death, whenever that occurs, and they also include an investment element that builds a surrender value throughout the life of the plan. WoL cover is frequently used as an effective means of mitigating expected inheritance tax liabilities on death. For example, if you know that there will be a GBP 100 thousand IHT liability on your death you can take out a WoL plan that provides GBP 100 thousand worth of cover.
Critical Illness Cover
At the turn of the 20th century, the average life expectancy was 45 years, deadly diseases killed millions (TB, Polio, Flu and so on) and premature death was a very real threat. However, significant medical developments over the last 100 years has meant that we are now living much longer and frequently suffering from a host of degenerative diseases – some fatal and some not, and some which mean we can never work again. For example, cancer is likely to affect one in four men and one in five women.
The life assurance industry has had to evolve to cope with these changes. And they came up with CIC, which covers the life assured in the event that they are diagnosed with one of a prescribed list of critical illnesses, for example, cancer , heart
attacks, and so on. Each insurance company has a different list of prescribed illnesses, and clearly, the more the better, although it may make the policy more expensive.
Why should you consider taking out life assurance?
You have family that depend on your earnings – this is by far the most important reason for taking out life assurance and CIC. If you have a family and they are dependent on your earning for their financial security and lifestyle, then you have a very real responsibility to take out cover. If you don’t, you are gambling with your loved ones’ quality of life.
- You have specific financial liabilities such as loans and mortgages. The sort of liabilities that you wouldn’t want to burden your survivors with if something happened to you, or you would like taken care of should you be diagnosed with a critical illness and be unable to work.
- If you have a significant inheritance liability (IHL) that your estate will be liable for on your death and you would prefer to pass on all your wealth to your beneficiaries, or you would prefer for your executors not to have to liquidate your assets to pay, then IHT is the preferred option
Protection, as term assurance, CIC and WoL are collectively known, is a crucial aspect of personal financial planning and one which, if neglected, can lead to entirely avoidable hardship. If you have family that depend on you it is a must and thereafter it has its place in a variety of aspects of financial planning.
That said, it is seldom bought without the advice of a financial advisor, despite its obvious importance and this is often contributed to our dislike of considering our own mortality or simply thinking that “it won’t happen to me.” There’s also a myriad of options available to customers and it is for this reason that it is advisable to seek the advice of a professional.
Don’t leave it to chance – it can be relatively inexpensive and can provide huge benefits.
Rupert Connor and Richard Taylor are independent financial advisors with Acuma Wealth Management. As qualified advisors in the region, they help expats get their finances in order, and maximise the financial opportunities available offshore and plan for future events.
Acuma Wealth Management offers three core services; wealth creation, wealth management and wealth preservation, which include retirement planning, pension transfers (SIPPS & QROPS), death tax and inheritance planning, life assurance and critical illness cover, group pensions and corporate benefit solutions, key man insurance and shareholder protection, and medical insurance.