Life Insurance Advice – Preparing for the unexpected

Life Insurance Advice

Protection is frequently about filling in the gaps left by the Welfare State.

In spite of the large amount of government expenditure involved, social security benefits are far from generous.

Their role is to provide a basic safety net, not to maintain your standard of living. Over the years, most social security benefits have failed to keep pace with the growth in earnings: benefits are generally linked to inflation, which is usually 1%-2% a year less.

The gaps left by the social security system can be seen by looking at two typical situations.

What would happen if illness stopped you working?

If you are an employee, your employer might continue to pay you, at least for a while. However, the smaller your employer, the more likely it is that the only payment you would receive would be statutory sick pay, which is a basic £79.15 a week in 2009/10. Additional financial support would normally be means-tested.

Statutory sick pay is not a long-term benefit. After 28 weeks the benefit ends, at which point you are transferred to the recently introduced Employment and Support Allowance (ESA). The ESA has replaced invalidity benefit. As its name suggests, the emphasis in ESA is on finding what work the claimant is capable of doing, rather than what their illness stops them doing. The structure of ESA is complex, but it begins at a basic amount of £70 a week, before rising to around £100 a week after 13 weeks, if a Work Capability Assessment shows that your illness does limit your ability to work.

If you are self-employed, you are not eligible for statutory sick pay and you can only claim ESA. However, you can claim immediately – there is no 28-week waiting period.

What would happen if I were to die?

State benefits for widows, widowers and surviving civil partners are a very complicated area, so much so that in the recent past, even the Department for Work and Pensions failed to give accurate advice. The bottom line is that the benefits are inadequate for most people.

If you are of working age, the main benefits are:

- Bereavement Payment This is a tax-free lump sum payment of £2,000, normally subject to a satisfactory National Insurance Contribution record (which thus generally rules out payments in respect of full time housepersons).

- Widowed Parent’s Allowance If you have a child for whom Child Benefit is paid, then your surviving spouse/civil partner could receive this allowance. The allowance ends when Child Benefit ends.

- Bereavement Allowance The bereavement allowance is payable to any surviving spouse/civil partner aged 45 or over not entitled to a Widowed Parent’s Allowance, again usually subject to a satisfactory National Insurance Contribution record.

There is now no such thing as a widow’s (or widower’s) pension for those under State Pension Age, nor is there any pension for unmarried couples.

Protection is also relevant in other areas not touched by social security. For instance:

- Protection policies can cover mortgages and other borrowings, helping to meet interest costs during illness or full loan repayment on death.

- The protection offered by private medical insurance can mean the difference between treatment at a time convenient to you in a hospital of your choice and joining the now shorter, but still present, NHS queue.

- Life assurance can provide the funds to pay an inheritance tax bill which could fall due if the person who makes a gift dies within the following seven years.

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