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I know life insurance isn't a cheery topic, but it's important for you to appreciate the risks of under-insuring yourself. Most critical illness cover is sold as combined cover with life insurance because buying it that way is cheaper than buying two separate policies. The problem is that wrapping different types of cover up into one neat plan can give you less cover than you think - and less than you need.
The principle to understand is that when you buy a combined life and critical illness policy - you're normally only able to make one claim. So if you make a claim for critical illness, the policy stops. This means that you immediately lose the life cover which was bundled into the same policy.
Worse still, if having made a critical illness claim the odds are that you would be refused life cover and if you were lucky enough to be offered cover, the cost would be horrendous! But if you had bought separate critical illness and life insurance policies, you can make a claim on your critical illness policy without having any affect on your life policy. This enables you to make a claim for critical illness and a separate claim can be made for your death.
Incidentally, most life policies also include what's called terminal illness cover. This means that if you are diagnosed with an illness from which you are expected to die within twelve months of diagnosis, the life policy will pay out on diagnosis. The other technical point to be aware of is that all critical illness policies have something called a "survival period". This means that after you are diagnosed with a critical illness, you have to live for at least X days, X being the survival period. Many insurance companies have set the survival period at 14 days but others have adopted 28 days.
So should you choose a combined policy or should you pay more for the comprehensive protection provided by two separate policies? For many the choice comes down to cost. So let's take at look at how much the alternative options could set you back. Let's look at plans to provide 100,000 pounds of cover over 25 years for a non-smoking, healthy man, aged 30. The premiums are guaranteed too, so they fixed for the full 25 years.
For a combined life and critical illness policy the cost was 23 pounds 80 pence a month. For separate policies, the monthly cost for life cover was 6 pounds 34 pence and 23 pounds 90 pence for the critical illness policy – that a combined monthly cost of 30 pounds 24 pence. This means that separate policies would cost me 27 per cent more than a combined policy.
But there is another way to look at it. Let's say you take out a combined plan with 250,000 pounds worth of cover. If you made a claim for critical illness you'd receive a lump sum for this full amount and you might use this money to repay your mortgage. Therefore, if you died during the policy's term you might not need as much life insurance as you've already repaid your mortgage. (But don't forget, your estate may still need cash to clear other debts, pay for care for your children etc.)
In other words, one critical illness payout of 250,000 pounds may be sufficient to provide full protection regardless of whether the claim is made for death. But you need to be aware that there are gaps in your protection. For example, if you died in an accident, the critical illness policy would not pay out and critical illness policies do not always cover all critical illnesses - you need to check this out. Also you might contract a critical illness and die inside the survival period, I referred to earlier. This would also mean that the critical illness policy would not pay out. To me, so long as I could afford the extra cost, I'd go for two separate policies as it give me total peace of mind.
Life insurance is one of those taboo subjects for normal, casual or friendly conversation. Whenever people, however, develop a life threatening illness, have a close encounter with another vehicle on the highway, or otherwise find themselves in a situation where they are likely to be rated or declined by an insurance company, they suddenly develop a desire for a good life insurance policy. To give credit where credit is due, there are some thoughtfully disciplined people who give their portfolios regular review and make certain they have adequate coverage at all times.
I want so much for all people to think like the disciplined ones. In my career as a life insurance agent I bent backwards to persuade such people to keep their life insurance up to date. I have seen the difference between an adequately insured breadwinner at death, and one who barely had enough life insurance to bury him. The latter situation is quite painful to observe.
I, therefore, think it is imperative that everyone take the time to evaluate and understand what life insurance really can do. Ask yourself this question, "do I need life insurance and why do I need it."
If someone, be it your wife, your children or your business partner, depend on you in any way that can be seen as a financial dependency, then you do need life insurance. In the case of premature death your family will need money to pay your last expenses, like outstanding bills, funeral expenses, attorney's fees, medical bills and estate taxes. The businessman will need life insurance to fund a "buy sell" agreement, to pay off outstanding debt, or may be to keep the company afloat while they find a replacement for a deceased valuable employee.
I implore you to look at the following situations which will help you decide whether or not you need life insurance. So just try to relax and objectively as you can evaluate the situation for yourself.
One Parent Only Working
The most devastating situation occurs when one parent works and the other stays at home. Should the working parent die at a time when there are insufficient funds for the survivors to continue living in the manner to which they have become accustomed, then they may have to sell the house. The comforts which they had enjoyed for years would totally change. The minimal requirement is sufficient funds which would allow the survivors to adjust their lifestyle.
The ideal situation is to have sufficient funds which would allow the surviving parent not to work at all, during the formative years of the children. They can live in the same house, they can continue in the same school, and when the time comes to enter college, they go to the college of their choice.
A good insurance policy is an excellent tool that you can use to take care of these things.
Both Parents Working
In todays world, in most families, both parents work and share the expenses. If one parent should prematurely die, would the income earned by the surviving parent be sufficient for the family to live on? Probably not. In anticipation of that possibility a fund could be set up, through an Insurance policy, to replace, totally or in part, the deceased parents income.
Single Parent Maintaining Family Alone
In the case of a single parent, all the financial responsibilities for the family may lay on his or her shoulders. If that parents died while the children are still in school, how will the children survive?
Partnership Or Corporation
Let us look at the situation where you own your own business. You have one partner or several partners. One partner dies. Is it not fair that the surviving partners should own the business and the deceased partners family receive full value for his or her stock? Adequate Insurance coverage can take care of this eventuality also.
It may be desirable by all parties concerned that the beneficiary of the deceased partner become a full and active partner, if this is the situation then the funds can be used as a cushion while the new partner or shareholder learns the business and adjusts to his or her new role.
Key Employee
Some employees are difficult to replace. It may take some time to get a replacement up to the production level of your long time, well seasoned and highly efficient employee. If your business depends a great deal on a particular key employee, would it not be wise to insure that employee in case he or she should die suddenly? The company would receive the death benefit in this case, and the money would be used to keep the company afloat, while a replacement is found and trained.