Insurance is an ugly word, but necessary to protect your income against the worst-case scenario. Nic Cicutti advises.
Here is a question to strike fear into the heart of anyone with a sizeable mortgage, a loan, a huge credit-card balance or a pension: if you fell ill or became unemployed, how would you pay off all your debts?
One answer is accident, sickness and unemployment insurance (ASU), available from mortgage lenders. Indeed, quite a few lenders make many of their deals conditional on taking out one of these policies.
While there may be some exceptions, the cost of such policies averages between #5 and #7 a month – depending on the initial waiting period and the length of time benefits are paid for – for every #100 of monthly outgoings.
It is possible to obtain cheaper cover. Berkeley Alexander’s Premium Mortgage Contract charges #4.75 a month per #100 of outgoings for unemployment and disability cover, subject to a 90-day waiting period. It also offers 25% of additional benefit free. GRIP’s cover is underwritten at Lloyd’s, and charges #5.50 a month, subject to 60 days’ notice.
What if it’s just unemployment you are worried about? Again, both Berkeley Alexander and GRIP offer unemployment-only cover. Berkeley charges #2.75 per #100 each month, again with a 90-day exclusion. GRIP’s charge is #3.50 a month (with six months’ free cover thrown in), with a 60-day notice period.
As for pensions, providers will almost always offer ‘premium waiver’, where your premiums are paid if you are unable to work through illness.
Scottish Equitable, for instance, charges 2.5p for every #1 covered, while Axa levies 3p for every #1. With credit cards, each issuer has its own protection. For instance, Barclaycard will pay up to #1,000 a month on outstanding debt for up to 12 months, if a customer has been off work for 14 consecutive days. The cost is 7p for every #100 outstanding on the bill.
Personal loans also offer payment protection cover. Midland Bank would charge #14.49 a month to protect a #2,000 loan at an interest rate of 16.9% APR, bringing the total cost to #195.69. A #10,000 loan from Midland over 50 months would cost #42.45 a month to protect. But you must be involuntarily unemployed and wait 60 days before claiming.
Are these policies worth taking out? Not according to many independent financial advisers. Andrew Ferguson, regional investment manager at Whitechurch Securities, in Bristol, says: ‘The problem is they only cover a part of a person’s bills rather than providing them with the income they need to meet all household expenses.
‘They are also restrictive, in that they run for a maximum of two years in the event of sickness, while a person may be forced to stop work for longer than that. Moreover, the small print often has so many exclusions that it is hard to compare between them – while often you are tied to that lender’s policy.’
Colin Fitch, financial planner at fee-based adviser Corporate and Personal Planning in Colchester, says: ‘Unemployment policies may not offer much cover to people who are self-employed. Generally, our advice is always to have an emergency fund that would tide you over the first few months if you lose your job. For sickness, income replacement is more suitable – and better value – than debt repayment.’
Philippa Gee, financial planner and managing director at Shrewsbury-based Gee & Co, adds: ‘A more sensible approach would be to take out permanent health insurance, which covers you in the event of illness up to retirement. Here, we are talking about income replacement rather than paying off debt.’
For someone aged 40, aiming to replace a gross income of #45,000 with net monthly payments of #2,157, potentially up to age 60, she recommends a Swiss Life policy which kicks in after 90 days and whose premiums and benefits escalate in line with inflation, at an initial cost of #59.17 a month. ‘They are not the cheapest,’ says Gee ‘but we have concerns about the claims history of others’.
Nic Cicutti is personal finance editor at the Independent
Berkeley Alexander: 01273 477784
GRIP: 0171 264 2012
Corporate and Financial Planning: 01206 853 888
Gee & Co: 01743 236982
0117 944 2266
COSTS OF COVER PER #100 MONTHLY REPAYMENT 12-month 30-day 60-day 90-day benefit period waiting waiting waiting period period period Unemployment #6 #5.50 #4.75 & disability cover Unemployment #3.50 #3.25 #2.75 cover only Disability #3.50 #3.25 #2.75 cover only Source: Berkeley Alexander