11/26/07Family protection: getting back to basics

We all know the importance of life assurance & income protection so that our families can carry on without us. But how much is enough? And have you reviewed your cover?

Life assurance costs have generally fallen during the last decade, so plans put in place in the 1990s may no longer represent the best deal. More importantly, perhaps, policies set up as much as 10 years ago may no longer be adequate to provide the protection that your family needs to cover:

• Any outstanding mortgage you have arranged especially if you have increased your borrowings to pay for home improvements or to buy a second home: and
• The cost of living generally, at least until the children are financially independent (which seems to be getting later and later) and to provide for a surviving partner.

It is also important to remember that it is not just the principal breadwinner who needs insurance. A "non-working" partner - or, to be more accurate, one who is not economically active makes a valuable contribution to the family's financial wellbeing simply by undertaking such tasks as child care, cleaning, cooking, shopping, washing, ferrying children about and so on. If the individual was no longer there, it may become necessary to pay someone else to perform these tasks.

For example, a widowed parent earning £25,000 a year might face a child care bill for one child averaging £720 a month, assuming a 48-week year; that is not far short of half their take-home pay of £1,561 a month, allowing for tax and national insurance.

Of course, there is likely to be a substantial Working Tax Credit available (including a child care element) under such circumstances. But child care is not the only financial challenge faced by a family when a parent dies, or is long-term incapacitated. Other "costs" can include:

• Extended support for children beyond normal school hours;
• Reduced principal income as remaining parent lias to cut the hours worked to cope with children's personal and emotional needs; and
• Additional expense for catering and home responsibilities.

To cover this eventuality, substantial life assurance, perhaps including critical illness insurance, may be required.

Of course, it is not just death that threatens a family's financial wellbeing. A sustained period of ill health could not only reduce earning capacity, but also increase living costs. For example, a sustained period in hospital following an accident or picking up an infection could involve daily hospital trips for family members, as well as added expense in buying essential equipment and extras.

Income protection insurance can go a long way towards helping cover the costs and is available for a wide range of occupations including for those who are not economically active, but have caring responsibilities. It comes in a number of guises, including accident and sickness insurance (which offers an income as well as some lump sum benefits and is offered on an annual basis), permanent health insurance (which provides an income and is offered for a fixed number of years, even up to retirement) and critical illness insurance, which pays a lump sum, rather than an income. There are also special covers for mortgage repayments, which tend to be cheaper, but are more limited than other forms of income protection insurance.

Private medical insurance can also not only provide for the cost of health care but can result in a speedier recovery, as treatment is often faster so that the period of incapacity is shortened. The benefit applies not just to those in work but also to children, whose education could suffer during any sustained period away from school.