Eight (extra) uses for protection policies

Protection policies can be more useful to your clients than you think. Matthew Stephen, head of product and sales technical at Prudential, explains why.

Protection policies have one basic aim – provide resources in the event of an unexpected happening. That expression ‘unexpected happening’ is the vague way of referring to something dreadful such as illness or death, so the stakes are very high for customers in getting the right product.

Above this basic aim, protection also has several uses – some perhaps more useful than others. Here, we look at the top considerations for the uses of personal protection products.

Paying off the mortgage

This is a valuable use of protection.

Mortgage protection is designed to pay out a sufficient amount to meet an outstanding repayment mortgage. Level term assurance could be used instead, providing surplus money.

Placing the policies in trust is important. The outstanding mortgage is a debt against the estate and effectively reduces other assets liable to IHT.

If the policy is not in trust, the proceeds would simply offset the outstanding mortgage and worsen the IHT.

Income for the family

Ensuring continued sufficient income after death is vital for those who have lost someone. Protection can be the means of providing this security.

Family income benefit provides regular capital sums on death. These sums look like income but technically are not – so they are not liable to income tax.

Lump sums from level term assurance can also be used to provide income.

Again, placing the policies in trust is important. Not just for IHT but, arguably more importantly, to make sure the money is available quickly, without waiting for probate to be granted and the estate administration to be completed.

Protecting income

What happens to household income in the event of illness and incapacity to work is not perhaps something people think about that much but it is also important.

One thing often overlooked by individuals is the extent of the cover taken out. Care is needed with the definition of ‘occupation’ because contracts vary. ‘Own’ occupation pays out if you are unable to do your own or any other similar occupation. ‘Any’ occupation provides cover if you are unable to do your own occupation and could not do any other work.

‘Own’ occupation provides better cover but it is more expensive.

Covering an IHT liability

Whole of life policies can be used to meet an IHT liability.

An estate of £200,000 above the nil-rate band carries an £80,000 IHT liability so a whole of life policy providing £80,000 funds that liability.