Would you take odds at 96/100?

If you were told that you had a 96% chance of a successful pay out, would you take it or walk away? Here we look at various forms of protection and reasons why it’s important for most people to establish some form of cover.

According to protection claims statistics issued by the Association of British Insurers (ABI), over £5 billion was paid out to individuals and families in 2015. Details are posted here: http://bit.ly/2veYPBs

Over time some people have developed an apparent distrust of insurance companies, often holding the belief that they won’t pay out, so it’s not worth it paying the premiums. Yet with over 96% of claims being successful, is it time for a rethink, especially if this means that you can provide financial support to your family and loved ones should the worst happen?

Whilst it’s commonplace for people to insure their home, car and pets these days, surely insuring the people that matter should take priority? A valid insurance claim can help to relieve the burden and financial strain which often follows death, serious illness or injury.

The ABI statistics confirm that the highest number of claims were made on whole of life insurance policies, which helped over 65,000 families. A whole of life policy is simply an arrangement designed to pay out a lump sum on death of the person(s) insured. There is no fixed term during which this can occur as there is no policy end date, so these plans are often used for inheritance tax planning.

A regular payment is made to the insurance company to provide the cover required on death (called the sum assured) and it’s important that these payments are maintained so that cover doesn’t lapse. Some plans have review dates inbuilt and others contain an investment element, so it’s important to understand the terms of the arrangement.

It is rare for death claims to be rejected by insurers – just 2% according to the ABI -  and the reasons behind why these are declined aren’t published, but most policies have exclusion clauses and some insurers refuse to pay out where the life insured has taken their own life, or if false declaration was made at the application stage.

Almost £3 billion was paid out to families with term assurance arrangements – policies set up for a predetermined period of time at the outset. Many people set these up to run alongside their mortgage, so if death occurs during the mortgage term the debt is repaid.

Income protection arrangements are designed to pay a monthly income for those who are unable to work due to medical reasons and provide a replacement income that allows claimants to maintain a standard of living whilst they are unable to work. In 2015 an average of over £17,000 was paid out to almost 30,000 individuals.

Over £1 billion was paid out in critical illness claims to over 17,000 individuals in 2015 and unlike life assurance, these policies are set up to pay out whilst you’re still alive in the event of a diagnosis termed a ‘critical’ illness, such as cancer or a heart attack. If you suffer one of the many illnesses covered, the policy pays out a tax-free lump sum. Cover like this allows people to continue to manage financially at what is often a very difficult time. Thanks to continued advances in medical research many serious illnesses are not as life threatening as they were previously, but they can still have a lasting impact, particularly financially. 

Total Permanent Disability (TPD) resulted in substantially less claims and payouts, but the average payout was almost as much as the average claimed for life assurance. TPD is designed to pay out a lump sum if the person insured is unable to continue work in their own (or any) occupation due to illness or injury and is often taken out as an additional option under life assurance and critical illness policies.

Nobody really wants to be in a position to claim, but insurance is about protecting yourself against instances beyond your control and can often be a small price to pay in comparison to the benefits provided in the event of a claim.

As with all insurances, when taking out a life or protection policy it’s important to disclose all pertinent information. Applications are medically underwritten, so providing false details or insufficient information at the outset could be detrimental to a future claim, meaning that you could become one of the four percent who do not receive a pay out.

To ensure that the correct type and level of protection is established and to make sure that the application is completed correctly it’s wise to seek professional advice.

Contact our Financial Planning team to discuss your protection needs. Our advisers are available at our office locations on 0808 144 5575.

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Armstrong Watson Financial Planning Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 542122. Registered as a limited company in England and Wales No. 7208672. Armstrong Watson Financial Planning & Wealth Management is a trading name of Armstrong Watson Financial Planning Limited. Registered Office: 15 Victoria Place, Carlisle, CA1 1EW