Life insurance, critical illness insurance and income protection

Styxx1000

My partner and I are about to buy our first house, and we need life insurance to cover the mortgage if one of us were to die. I've had some quotes, and generally speaking it seems that brokers recommend that we take life insurance, critical illness insurance and income protection. However, I'm well aware that they're likely to try to upsell us, and I don't really know what is worth getting and what is unnecessary, so I'd like your opinions if I may.

I am 35 and my partner is 32. I am self employed and she works for NHS, meaning that she gets the standard NHS benefits when it comes to sick pay etc. We have no children and no dependents.

The current quote we're looking at is from the mortgage advisor. The provider for that quote is Royal London, and the monthly cost is about £70. This covers:
 - life insurance for the full value of the mortgage, on a decreasing basis (£9.80)
 - critical illness cover for both of us to the value of £50k (£30.11)
 - income protection for me, which kicks in after 4 weeks (£16.90)
 - income protection for my partner, which kicks in after 26 weeks (£7.63)
 - waiver of premiums for both of us (£3.02 for me, £0.67 for her)

Can anybody advise, does this seems sensible? I don't know the exact percentage of the income protection but it looks like around 60% of our respective wages. What do you have, or what would you do in my position?

kingstreet

The life cover and IP should be in everyone's shopping basket. The CI less so as it requires a diagnosis of one of a list of conditions often at or above a specific level. EG Prostate Cancer requiring a score of Gleason 6 or higher. It's nice to have, but not essential IMHO.

When will your partner's service take her to six months' full pay, six months' half pay? IP at that point can have a 52 week deferred period and made cheaper.

Four weeks deferred for you? Won't you have an emergency fund which you can live off to enable you to reduce the IP cost with a 13 week deferred period?

Have a monthly benefit for the two of you equal to your monthly mortgage cost and monthly outgoings and split it in proportion to your net monthly incomes. EG If you both earn the same, insure 50% each then if you're both off sick at the same time, you have enough to cover all your outgoings. If one of you earns twice the other, split it 2/3 to 1/3 to achieve the same objective.

Sandtree

First of all, double check what the "income protection" is as two different products are sold with that title that are very different beasts - PHI is the full fat product that premiums typically dont change (other than possibly with inflation if you;ve linked the benefit to inflation) and will pay out for as long as you are unfit to work up to your retirement age (you define this at the start. ASU/PPI is the other version thats the budget product with annually reviewable premiums and only pays out for a max of 1-2 years.  You dont mention the level of cover but the premiums look more likely to be ASU

Who is doing this quote for you? Many whole of market mortgage brokers are tied agents on the insurance side which means options are limited and pricing typically high... certainly I'd speak to a whole of market protection insurance broker or IFA if your person isnt one.

The two of you need to sit down and consider the different scenarios of you becoming ill, dying, changing job so benefits are different etc. Both now and in 10 years time when you potentially have (more) kids etc as getting the right insurance now is likely to be cheaper than getting it in 10 years time when you've developed high blood pressure etc.

My personal preference is Income Protection (PHI) > Life > Critical Illness but that depends on if you can comfortably live on just one of your salaries etc.

Styxx1000

kingstreet said:

The life cover and IP should be in everyone's shopping basket. The CI less so as it requires a diagnosis of one of a list of conditions often at or above a specific level. EG Prostate Cancer requiring a score of Gleason 6 or higher. It's nice to have, but not essential IMHO.

When will your partner's service take her to six months' full pay, six months' half pay? IP at that point can have a 52 week deferred period and made cheaper.

Four weeks deferred for you? Won't you have an emergency fund which you can live off to enable you to reduce the IP cost with a 13 week deferred period?

Have a monthly benefit for the two of you equal to your monthly mortgage cost and monthly outgoings and split it in proportion to your net monthly incomes. EG If you both earn the same, insure 50% each then if you're both off sick at the same time, you have enough to cover all your outgoings. If one of you earns twice the other, split it 2/3 to 1/3 to achieve the same objective.

I had to look up my other half's sick benefits as I wasn't aware that's how it was structured - it looks like that level of benefit comes after five years service, so she's already passed that point and would get six months full, six months half pay. Looking at the policy details, RL specifically have structured for NHS workers that the benefit would kick in when the NHS benefit reduces, i.e. at the 6 month mark, so I guess that's why the quote has been structured as such.

Four weeks for me is what was suggested, rather than something I chose. I've not had IP before so I don't really know what's standard/recommended/necessary. We will build up an emergency fund, although all our money is going on the mortgage deposit at the moment so that'll likely be a year or so away. Either way, I think 13 weeks would be sensible as you suggested - realistically I think we could live off one wage for three months.

That sounds like a very sensible way to structure the IP, I'll see what I can do about changing the quote accordingly. 

Sandtree said:

First of all, double check what the "income protection" is as two different products are sold with that title that are very different beasts - PHI is the full fat product that premiums typically dont change (other than possibly with inflation if you;ve linked the benefit to inflation) and will pay out for as long as you are unfit to work up to your retirement age (you define this at the start. ASU/PPI is the other version thats the budget product with annually reviewable premiums and only pays out for a max of 1-2 years.  You dont mention the level of cover but the premiums look more likely to be ASU

Who is doing this quote for you? Many whole of market mortgage brokers are tied agents on the insurance side which means options are limited and pricing typically high... certainly I'd speak to a whole of market protection insurance broker or IFA if your person isnt one.

The two of you need to sit down and consider the different scenarios of you becoming ill, dying, changing job so benefits are different etc. Both now and in 10 years time when you potentially have (more) kids etc as getting the right insurance now is likely to be cheaper than getting it in 10 years time when you've developed high blood pressure etc.

My personal preference is Income Protection (PHI) > Life > Critical Illness but that depends on if you can comfortably live on just one of your salaries etc.

I had no idea there were two different versions of IP, thanks! You're right, it's two-year cover I've been quoted for. 

The quote has come from my mortgage advisor. There's another insurance broker I've been wanting to speak to as well, but I'd rather get my head around this a bit more before doing so - if I'm going to be comparing quotes then I feel like I need to have a good understanding of what I'm trying to compare.

Many thanks to both of you for your input! Very helpful, it's given me a lot to consider.

Sandtree

Styxx1000 said:
I had no idea there were two different versions of IP, thanks! You're right, it's two-year cover I've been quoted for.

The problem is "permanent health insurance" just confuses people so PHI got called Income Protection a long time ago.

PPI/ASU obviously became a toxic name with the PPI miss-selling scandal with loans/credit cards etc and so the marketing department decided it was time for a better name and decided Income Protection sounded good.

If you look on here you'll find many people complaining that their ASU provider tripled premiums over night or simply refused to renew the policy... something that cannot happen with PHI. Many have also dropped the unemployment cover and so just selling "AS" (and many not selling at all) due to Covid.

It has its place but you have to know its limitations, namely what are you going to do after 2 years when it stops paying out? One of the Protection specialists will know the actual average PHI claim duration (my interests are more general insurance and technical back office stuff) but its over 5 years from memory and if you're 35 then potentially it could be over 30 years if you were unlucky.

kingstreet

Take care. RL offers PHI with 2Y, 5Y and Full Term claim payment options.

Try to use my suggestions above to reduce the cost enough for you to be able to get Full Term. Always choose "Own Occupation" definition of disability. This means a payout if you are unable to do the main functions of your own job. "Work tasks" is cheaper but won't pay out if you can hold a pen, use a keyboard etc.

On the 26 week thing for your partner, chances are there will be no payout from RL in weeks 27-52 as she will be still be earning enough. The benefit is "instead of" not "in addition to" so look at 52 weeks deferred.

csgohan4

I am skeptical when it comes to NHS benefits. I would take matters in my owns hands and have a policy on my own terms. There have been cases where the NHSba has refused  to pay out because holders have 'died' on the wrong day i.e working locums on the day they died while working for the NHS 

Some will also lose their benefits if they get a criminal record as well. 

Also for those who opt in and out of the NHS benefit for tax reasons, also run the risk of not being covered for these benefits. 

I would suggest a broker if your not sure, otherwise you can DIY it. I pick 12 months deferment for my IP, seems the best in cost/ balance. I already get 6 months full pay and then 6 months half pay after that so make sense.