Any unexpected events, especially serious illness or death can be a massive shock to families. Parents have responsibilities, many of which don’t disappear should they become seriously ill, disabled or even die.
This can be even more applicable to expats whom may have additional costs such as children’s school or university fees, loans in foreign countries which have to be cleared before anyone leaves the country, not to mention the expensive cost of moving all your belongings to a different country.
Having adequate contingency planning in place is key to making sure that you and your family can continue their lifestyle if you’re seriously Ill or even gone. The right plan will mean that in difficult times, your finances are not adding to yours or your families worries.
Studies have shown that over 50% of families in the UK have no life insurance whatsoever. A recent study claims that the life insurance gap in the UK is over GBP 3.77 trillion. In my experience the figures rise significantly outside the UK and Europe.
The aim of this guide is to help you understand the different types of cover, which you might need to consider and how much cover you might need.
As always Expat Wealth Adviser is here to bring Knowledge, transparency and simplicity to the offshore financial services world. We are happy to answer any questions, give you a second opinion on any recommendations you have received or introduce you to one of our panel of insurance specialists.
There are many ways to protect your family which I will go through in detail in this guide. The general rules are that you have contingency plans in place for:
After getting a clear picture of the above its time to start working what your short falls and your options to plug any gaps.
Generally, emergency’s, loss of job and sickness will be covered by either your employer’s continuation of your salary plus your emergency funds. 3 – 6 months expenditure is recommended for your emergency cash buffer which ideally should be kept in a safe jurisdiction like the Isle of Man or Jersey.
The rest can be insured against!
Income Protection
This type of cover is typically available in the more developed world such as the UK and some European countries and not available in the Middle East or Asian Countries.
It will protect an amount of your earned income from employment and sometimes private company dividends. It does not cover non earned income I.e. rental or investment income.
The payment is usually deferred for 1,3,6 or even 12 months. These deferral periods would usually depend on when any company benefits cease to pay and your capacity for loss. The longer the deferral period the lower the cost of the cover.
Income Protection will provide an amount of your salary until usually 55, 60 or 65 and typically increases inline with inflation. A general rule is that the cover will be up to 55% of your taxable earnings and be capped at GBP 150,000 p/a.
For a successful claim to be made a GP will need to sign you off work and the payment will be made until you return to work, die, or reach the end of the term. You will need to provide written medical evidence from your GP, surgeon or consultant and evidence of loss of income.
If you return to work in a reduced capacity or part time the cover will still pay out the difference between your insured amount and your new earnings.
The income from an income protection plan is not taxable in the UK however other countries may have their own rules.
Compared with other insurances, income protection can be expensive.
Critical Illness cover is often missed by individuals as some wrongly assume their company provide something (this is extremely rare) or they see it as less important.
Due to the fact that its significantly more likely that someone contracts a serious illness than dies especially during their working life, critical illness (CIC for short) is arguably the most important of all protection policies.
CIC provides a lump sum or an income should the life assured contract any of around 35 (up to 43 with some insurers) defined critical conditions. Heart attacks, cancer and strokes would be the 3 of the most common.
This pays out a cash lump sum of you become permanently disabled due to physical injury or illness and is usually bolted onto to either life insurance or critical illness cover.
This pays out the sum insured during a specific time frame. You could cover yourself up to any age, the most common being 65 or when the personal expects to retire or just become wealthy enough to retire.
This pays out in a specific time frame the sum insured adjusted up usually for inflation. The cost would be slightly higher than with level term.
These are popular with people insuring against a decreasing liability I.e. a repayment mortgage which decreases over time.
This policy pays out regardless of when someone claims. Usually the most expensive cover due to the fact it has to pay out one day however there are variations of this type that come with an investment element also.
The cost of all the different types of cover will vary depending on many of the factors listed below:
The more at risk the insurance company is of having to pay out and the more they have to pay out the higher the premium.
A 30-year-old non-smoker looking for life insurance only would have a very different premium to a 60-year-old smoker with a history of medical conditions looking for critical illness cover.
Life insurance is the cheapest of all cover as it has the lowest possibility of having to pay out. Decreasing term life insurance is the cheapest due to the reducing amount of cover.
Like with anything financial, it really depends on your current situation.
An experienced, qualified financial advisor will help you to determine your current needs and find the right solutions for you.
Prior to your meeting with an advisor the below checklist should give you an idea of what to think about when protecting against illness or death:
The answer to that is nearly always yes and most insurers offer a free ‘off the shelf trust.’
When a life insurance policy is settled into trust it’s ensuring that:
A split trust would allow the policy holder to receive any critical illness payments but the proceeds on death to be paid out to any named beneficiaries.
What Else Can I Be Doing?
These last three points are good bits of housekeeping that are often overlooked by financial advisors, usually because they won’t get paid anything for talking about them. All are easy wins!
Without a valid will your assets may not be distributed in line with your wishes and administering your estate may be a lengthy painful process. Wills generally should be made in the countries you have assets and redone of you remarry.
A valid will has the following benefits:
A beneficiary trust only comes into effect on the death of a relevant person and literally speeds up probate and ensures the proceeds go to your named beneficiaries.
This is more applicable to the residents of the middle east living in a sharia law environment. Bank accounts in these countries can be frozen if an account holder dies and funds can take ages to release.
Residents of the middle east are advised to hold at most 3 months salaries plus rent, grocery and holiday money as examples and transfer everything else to jurisdictions with a more robust common law banking sector such as Jersey, Guernsey or the Isle of Man.
Transferring money back to your home country does not mean you have to pay tax. Money earned in the middle east is classed as taxed income, albeit at zero in most countries it’s still taxed. Tax is mainly on profit so with interest rates at mostly zero in current accounts there will be no income tax to worry about.
I hope you found this useful.
We are on a mission to bring knowledge, transparency and simplicity to the offshore financial services world, it’s time for the industry to up its game.
Feel free to reach out to ask any questions.