Should I get addtional protection on top of my employment benefits?

ArcticGiraffe

Hello,

I'm after some advice.

My employment benefits give me critical illness protection and will pay 75% of my salary if I get critically ill for the rest of my working life (if I can't go back to work). If I die, a payout of 4x my salary (more than my current mortgage debt) will be paid out to my named recipients.

Been talking to a guy from L&C and he is saying that even though I have good policies in place I should still consider taking out an additional policy for the following reasons.

1. If I get the policy now it will be cheaper than if I get it later on - prices will have gone up but I will be paying today's prices in the future if I get it now.

2. I'm unlikely to remain in the same job forever (very true) and the next one may not have benefits this good.

3. It could be useful to have an additional lump sum payout should I get critically ill in case I need to spend money on things like making my house more suitable to live in and stuff.

I don't currently have anyone who depends on my house should I die. He's going to look at what I can get for between £20 - 30 / month for critical illness protection.

What are other peoples opinions on this? - should I get additional protection? Does he make a good point or does it sound like he's just after more commission?

Thanks,

Alan

lisyloo

Well firstly as far as income goes I think there is a limit of what you can receive (there certainly was in the past) and I believe it's 75%.
That's because if people got > 100% then there would be a huge amount of fraud.

So if he's talking about income protection then I would drop him as an advisior immediately.

However the PHI (permanent health protection) is not the same as critical illness.
It probably pays out an income if you cannot work.

Critical illness pays out a lump sum, which is often insufficient to cover a lifetimes income for anyone young. However it would pay for house modifications or a nice holiday before you die.
Insurance is always a trade off. You can't have absolutely everything as otherwise you'd spend most of your income. You have to decide what's sensible.

1) Is true but is not a good reason to take a policy if you don't need one.
2) Is also true but you can always review when you move jobs.
3) Yes, it's true, but how much of your income do you want to spend on insurance?

I personally would be happy with what you've got.
You can always get more so nothing he has said is wrong, but it's really whether it is necessary. Personally I would say no.

I don't know the details of your works policy, but I think you are probably slight incorrect.
You works policy probably pays an INCOME until you retire if you CANNOT WORK.
Critical illness pays out if you get certain illnesses and pays a LUMP SUM.
The downsides aof critical illness are:
1) insufficient for long term income
2) Doesn't relate to whether you can work or not
3) only certain illnesses.
So as he says more suitable for house modifications than real income protection.
Personally I think CI is a bit of a luxury and PHI is much more important.
You need to cover your income and not doing up your house.

It really is up to you where you draw the line, but IMO you have pretty good benefits (although you haven't mentioned redundancy).

I would be seriously worried if he is trying to sell you more income protection as I suspect you are at the legal limit and that would be bad advice.

dunstonh

So if he's talking about income protection then I would drop him as an advisior immediately.

I wouldnt quite yet. The OP calls it critical illness cover. Not PHI or income protection. If it is just critical illness cover then PHI running along side it would be the sensible option. If its misnaming the product type then not.

lisyloo

Yes, the first and last sectence of my post say that if he's selling income protection then that's bad.
I think the OP has income protection and the advisor is trying to sell critical illness.

But the OP needs to clarify and be aware of the difference.

ArcticGiraffe

Thanks for the comments. Sorry I was a bit vague (I wasn't really aware of the differences) - I believe I understand now though - hopefully this will clear it up.

Quote from my HR dept:

The company pays into a life insurance scheme for its employees. In the event that you die, your beneficiary will receive a sum equivalent to four times your annual salary as a one off lump sum

For Critical Illness-the company pays into a Permanent Health Insurance scheme for its employees. Subject to acceptance of a claim, this phi kicks in after SSP has finished and the employee receives a monthly sum of money, equivalent to 75% of their monthly salary. There is no time limit on this, except retirement from the company’s point of view

I also pasted this directly into an email to the L&C guy which he responded to by recommended that I look at critical illness cover - which I don't appear to have through my benefits already - though confusing as the HR person stated that the PHI was 'for critical illness' but probably that was because of how I worded my question to her in the first place - my HR contact advised me to talk to the company financial advisor they have if I needed more information about it.

It's useful for me to know what most other people would do and what it would actually mean to me. It puts it into perspective to hear critical illness cover described as a luxury ... I generally go by the rule of thumb that if I can afford to loose something, then there is no point in insuring it since I'm more likely to pay more in insurance than end up making a (successful) claim.

lisyloo

I think your HR person has worded it badly because critical has a specific meaning.
You probably have income protection which is really good news as it pays out if you cannot work (regardless of the type of illness).

So a lump sum for critical illness would be nice for
1) adjusting your home to suit a disability
2) a last holiday before you die as life insurance only comes after (sorry to be negative but it's a possible use)

It really is up to you as to whether you want to spend money on getting an additional lump sum in addition to having your income covered or do you have better uses for the money e.g. paying off your mortgage.

Personally I think you have the basics (life & sickness) well covred and you are moving towards the discretionary end.
You should also consider your redundancy situation.
I don't know what your career is in but most of us a far more likely to get made redudant right now.
It really is a question of priorities.

dunstonh

CI should really be in the pecking order behind life assurance and PHI for looking at priorities. It is a bit of a luxury in that respect but it does have good claim statistics. 1 in 6 will suffer a claimable event before retirement. That compares to in 1 in 5 for life assurance. However, in most cases, PHI would pay an income until retirement or you are able to return to work if you suffered a critical illness (or any illness that keeps you off work). So, there is a bit of overlap and the PHI is wider ranging.

Most people cannot cover everything. You have to prioritise. The mortgage adviser has a responsibility to point out your shortfalls but that doesnt mean you have to do them.

ArcticGiraffe

I will be clarifying with my HR department what they mean now I understand the differences better. Thanks for the help

The comments above have influenced me to think that critical illness cover is probably unnecessary for me the way I feel about risk and value for money.

I am in the technology industry and I believe I have quite a high risk of redundancy. I have recently been made redundant in fact (getting a nice sized payout which I intend to put straight into my (newish) mortgage) - since I was lucky enough to walk straight into my latest position without any break in salary.

I think this means that I'm starting again from a redundancy point of view so my question now is, should I ...

1) hold something back from paying into my mortgage in case I get made redundant again soon.

2) whack it all into the mortgage and take out a policy to protect against being able to continue to pay it in the event I get made redundant in future

3) not worry about it - pay off as much mortgage as I can as soon as I can and not bother with a redundancy policy?

I don't currently have a personal redundancy policy in place. Is it common for employment benefits to cover for this? Or is it usually based purely on length of service, salary and maybe age? I've worked for nearly 6 months in my current employment.

lisyloo

You need to tkae a look at your employment benefits regarding redundancy, but they are generally related to your length of service, so chances are right now you would have a poor package.
Statutory redundancy doesn't start until 2 years service, so if you were made redundant now you would get your notice period plus any holiday pay. If you are on a probationary period your notice period might be very small.
Your employer might offer you better benefits, so you need to check what they are but chances are they aren't great as you haven't been there long.

1) You should always have some form of emergency fund for a rainy day. This can be for any type of emergency e.g. roof, boiler, insurance excess after car crash etc. but also can help with job loss.
Right now the risk of job loss is higher than normal but ALSO the period btween jobs for many people is a lot longer.
2) You could get yourself an insurance policy to cover. Whether you want this depends on
a) whether you have another income in the household
b) how well you could manage on savings
But you do idelly need insurancae and/or savings.
Personally I choose savings only but I have a working spouse and relatively low living costs so could live off one salary, so it is always dependent on your situation.
If you are the only income then clearly one of the main concerns is the mortgage.
So you could (for example) get insurance for your mortgage and hope to live off savings for living costs.

3) The problem with this, is what happens if you get made unemployed and can't pay the mortgage. You'll initially go into arrears but eventually you will get repossessed. If you are single that's different to havign a wife and 4 kids, but even alone it would screw up your credit rating for a long time.

I think you need some sort of plan which is a combination of
1) formal insurance
2) employment benefits
3) savings
4) winging it i.e hoping your family will sub you short term.

"winging it" IS a viable option, provided you understand the risks (which in this case might be losing your house).
You have to weigh up the risks against the costs, because whilst you are paying the insurance you won't be redugin your mortgage.

ArcticGiraffe

Well my situation is this:

I'm (now) single and don't have any dependants
I'm about to remove my ex from the joint mortgage (very amicably)

The currently mortgage debt is 150k - the house value is around (a little under) that mark too, according to my mortgage lender (bought 5 years ago for 172k)

The lender is happy for me to take this debt on by myself in about a week from now when I come out of the probationary period of my first 6 months of employment with my new employer. I'm getting a solicitor to handle that.

I really like where I live - I don't want to risk loosing this house if I can help it.

I have about 22k of savings right now (mostly from redundancy money I got at the end of last year) - I feel that money would be better paying off my mortgage than as savings - perhaps keeping 5k back for rainy days. (I never thought rain could be that expensive!)

I think I'll ask the L&C guy to give me some quotes for mortgage payment protection in the event I get made redundant.

Am I being sensible?

Thanks for all the excellent advice

lisyloo

£5K might sound like a lot but if you needed to replace your boiler you will probably find it will cost a few thousand.
Also £150K is a fairly large debt to service on your own.

Bear in mind that if you get insurance there may well be a 30 day or 60 period when you cant claim, so you need to support yourself for that time.

Generally you are right, that paying down debt is a good idea and the savings would count against you for means tested benefits.
Just make sure you have enough.
It's difficult for anyone else to say because only you know how much you need to live off for a few months whilst waiting for the insurance to kick in.

I think it would be sensible to look at insurance against losing your job, but it would make sense to talk to an advisor who can advise you on all the products out their on the market and not just L&G.

dunstonh will be right about the statistics, but my gut feeling is that the sickness stats
will be positively skewed with age i.e. if you are young the risk is less.

But in general my feeling is that you are more exposed on the job loss side than the sickness side because you have nothing (except savings) for job loss whereas on the sickess side, the income is already covered and the lump sum would be additional.