Critical Illness Insurance: Your Policy Should Cover Your Children

Most critical illness insurance policies automatically insure your children but with a lower level of benefits than the main policyholders cover. But don’t under-estimate this cover as it is invaluable, especially if your child becomes critically ill and you need to take time off work to provide care.

Critical illness insurance pays out a tax free capital sum if the policyholder, or one of their children, suffers one of the very serious illnesses scheduled on their policy. The only rider is that the claimant must survive at least 28 days after the diagnosis.

Nick Kirwan, Protection Marketing Director at Scottish Provident, one of the UK’s largest critical illness insurers, said that claims for children are now the fourth largest cause for a claim.

“Work takes a back seat when your child becomes ill. You may need to cut your working hours or even stop working altogether,” Mr Kirwan said.

If your critical illness policy does insure your children, then a payout from the policy gives you the financial flexibility to do just that. So how much will they pay out?

Most insurers will pay a proportion of total insured value if a child becomes critically ill. For example, Norwich Union will pay out 50 per cent of the insured sum or £10,000 whichever is the lower – and this cover includes adopted children and step children.

Standard Life and Legal & General will also pay up to 50 per cent with Standard setting the maximum payout at £25,000 and in L&G’s case; £15,000.

However, cover does not start as soon as the child is born. While some policies cover starts up at 3 months, others wait as long as three years. Ideally, you want cover to start as early as possible.

Another other point to understand is that if the main policyholder has a claim, then the policy pays out and terminates – they can’t claim more than once. But if there is a claim for a child, the policy does not terminate – the cover for the policyholders continues unaffected. And if you start or add to your family after you’ve started the policy there’s no need to inform the insurer as the cover automatically covers all your children.

But not all insurers will insure your children. The Halifax, National Westminster and Nationwide Life will not include any cover for children. Therefore, if you have or intend to have a family, it is vital that you tell your adviser and then he or she will ensure your policy includes the necessary cover.

And that brings us to the topic of professional advice. You can buy critical illness insurance online yourself, but honestly it isn’t worth the risk. In our experience over 50 per cent of DIY buyers don’t get it exactly right.

There is little standardisation within critical illness insurance so you are unlikely to get your ideal policy if you buy on the price alone. It is one of those situations where a low price can turn out to be a costly mistake.

In order to get the ideal policy your adviser needs to understand how much you can afford and what aspects of cover are most important to you. It’s then a matter of using experience and product knowledge to find the best options. If this sounds like a receipt of throwing your discounts down the drain, it isn’t.

Very few high street brokers will give you any discount but shop online with one of the specialist critical illness brokers and you’ll get full service and a discount. How do you find them? Well actually, you don’t need to look any further. This web site works with a specialist critical illness broker called ClickLife.

Life Insurance Can Reduce Your Liabilities

It’s an old saying that there are two certainties in life – death and taxes – and there is definitely a ring of truth in this, but the real misfortune is when the two combine. You work hard all your life and manage to put aside a little money to pass on to your heirs, but what happens when you die? The taxman turns up to demand his share, and the way that the inheritance tax rules have been allowed to lag behind inflation ensures that the numbers caught in this trap increase every year.

Currently when you ‘kick the bucket’, ‘cash your chips’ or whatever other colloquialism you use to avoid saying ‘die’, the value of your estate will be of great interest to the Inland Revenue. They will look at the total value of all your cash, investments and possessions, which value they will most generously allow you to reduce by the value of your debts (mortgages, loans etc.). Out of the remainder, your estate will be allowed to retain value up to the threshold figure where taxation starts. Any amount above this figure will be hit by inheritance tax (IHT) at a rate which is currently set at 40%.

However, the threshold figure at which IHT starts has not been increased sufficiently to maintain its value in recent years. At present it is calculated that 10% of households are hit by this tax, but it is expected that this figure will increase to 15% within a short time, and that unless corrective action is taken it will continue to increase.

Since this tax was introduced by the Labour government in 1975, when it was nick-named the ‘Robin Hood tax’ because of the intention to hit the estates of the rich, it has taken an unfortunate change of direction. Rich families can and do employ accountants and solicitors to reduce their liability to IHT, whilst the ‘ordinary’ families who cannot afford to pay for professional services have to pay the tax.

‘Could be worse’ you may be thinking, under the illusion that your estate will never hit the heady levels of six figure values, let alone £300,000 or more. This may be true but have you included the value of your house in your total. You may have bought it 30 years or more ago when it only cost a few thousand, but what is it worth now? You may be shocked to find that its value can absorb most, if not all, of the tax free IHT threshold, leaving any other assets taxed at 40%!

So how can you protect your estate from the Chancellor’s depredations? Presumably your house will be in joint ownership between your spouse and yourself, as are most in the UK; this means that when the first death occurs, the house will pass untaxed to the remaining partner, because there is no taxation on transfers between husband and wife. So what could have been two tax free sums available has effectively wasted one, as only the survivor’s will be used on their death.

To deal with this you need to talk to a solicitor to arrange for ownership of your home to be changed to ‘tenants in common’ so that you both own a half share of the house. This will remove half of its value from each of your estates, although a will becomes essential to provide for ‘disposal’ of either half.

Now, what about the remaining taxable value? How can it be safeguarded? Provided that you have done your calculations accurately (within the limits of having to forecast future movements in values), you will have a figure which should be approximately what the taxman will require from your estate after your death, and before any bequests etc can be dealt with.

This is where life insurance can show its value to your beneficiaries. If you now take out a ‘whole of life’ policy for the calculated sum and have it written ‘in trust’ so that it does not form part of your estate and therefore avoids IHT, it will pay out on your death a sum approximately equal to the IHT liability. Having settled that, your estate should then be available at or close to its actual value for distribution within the terms of your will.

You will need expert help in dealing with the requirements of your will and arranging the life insurance. You have done enough work in calculating your IHT liability, so why not take the easy way out now? Have a browse through the internet pages for a suitable broker and hand the remainder of the job over to him – you will have the satisfaction of knowing that all the details are correct and that there is nothing which is liable to cause problems for your heirs.