A young person today is far more likely to suffer a serious illness than they are to die so a critical illness policy should be a higher priority than life insurance.
However, due to today’s lifestyles and the advances in detecting a critical illness the cost for this type of insurance is quite high.
This is where you as a parent could step in by not only helping them secure a policy but also saving your estate some potential future Inheritance Tax.
What a critical illness policy does
A critical illness policy is insurance that will usually pay out a lump sum if the insured person suffers from an illness specifically covered by the policy.
It is not life insurance; it does not pay out on death. It only covers specific illnesses.
When taking out the policy you will select the amount of pay out (lump sum) you would like, how long you would like the cover to last (the term) and you will then be quoted a monthly premium.
Providing you continue to pay the monthly premium for the term of the policy you will be covered.
At the end of the term if you have not suffered a critical illness then the policy ends and that’s that.
According to the LV risk calculator there is a 24% chance a 25-year-old non-smoker will suffer a serious illness before the age of 65. This is nearly three and half times more likely than they are to die. Yet I bet when most young people take out their first mortgage, they will only think about life insurance.
One of the reasons for this is because a Critical Illness policy has become quite expensive.
A 25-year-old non-smoker applying for £300,000 worth of cover on a 25-year term will be quoted around £50 per month.
Not taking out a policy involves risk. A person needs to decide what they would do if they suffered a critical illness like a heart attack, stroke, loss of limbs, cancer or Parkinsons amongst others.
They could be off work for a long time, the mortgage and bills will still need to be paid. They may need to make lots of adjustments to their home to help with mobility after the illness.
An even more worrying statistic is that the same young person above will have a 56% chance of not being able to work for two months or more.
Now this might not be due to a critical illness, it could be because of an accident or maybe mental health reasons.
Again, a person needs to think about how they would cover all their bills if their employer stopped paying them.
Here is where an Income Protection policy could help. It’s different to a critical illness policy in that it doesn’t really need to know why you are off work, just that you can’t work. It then pays out a monthly ‘income’ to you for either a fixed amount of time or for as long as you are not able to work.
Gifting a critical illness policy
If you are in a position where you are retired and have a good idea that you have all the money you are ever going to need then you might be thinking of what to do with the excess.
One way to really help your children out without giving them cold hard cash is to pay for a critical illness policy on their behalf.
Hopefully they will never see a benefit from this money, but it could be really valuable to them if something was to happen and they did in fact suffer a serious illness.
You could work with your children to understand what level of cover they need, get them quoted and then transfer the monthly premium to them in order for them to pay the insurer.
You can’t take out a policy directly for them unless you can prove you would be reliant on them in some way financially.
So, the best thing to do is to ensure the child takes out the policy but you in fact pay for it.
You could do the same for an income protection policy too.
The money you transferred to your child would be classed as a gift for Inheritance Tax purposes but if the total annual premium was below £3,000 then this would be covered by your annual gift exemption (provided you had not used it elsewhere).
So, this could be a really good way for you to start reducing your estate for Inheritance Tax and reducing the overall bill that could be payable on your death.
Plus, this is a really powerful thing you would be doing for your child. Not just giving them cash that they could waste on something immaterial, you’re buying them peace of mind and ensuring their own financial plan is built on solid foundations.
It could cost you a lot more in the long run if you did have to bail them out if the worst was to happen and they didn’t have cover.
If you would like to get your family financial affairs in order and create a protected succession plan then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy and protected retirements over the years. This could be you too.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.