PROTECTION INSURANCE – AN ABI CONSUMER FACTSHEET
Personal debt has reached a record high. The average UK household has
debt, including mortgages, totalling some £56,234. With median annual
earnings at £23,764, this is a worrying trend.
With the economy looking less stable, more people are becoming concerned
about how to protect themselves and their families should they find
themselves unable to keep up with loan repayments, perhaps through
unemployment or ill-health.

People need to think about the risks involved when they take on debt, either
when buying a home or taking out personal loans or credit cards.
Being unable to meet mortgage or other loan repayments could damage your
credit rating and jeopardise your ability to borrow in the future. You could even
have your home repossessed if you fail to keep up payments on mortgages or
secured debt.
The main question to ask is how would you deal with debt repayments if you
no longer had a regular income, because you lost your job, or were ill and off
work for a long period?
Insurance can play an important role. The main products available to help in
these circumstances are:
Life insurance
If your priority is to protect your dependents in the event of your death, you
should consider life insurance, which pays out a lump sum to provide financial
support to your partner or family. Some policies also have an investment
element.
Some life insurance policies are valid for a specific length of time (term
insurance) and others for the rest of your life (whole of life). Whole of life
policies are in effect an investment product as they are guaranteed to pay out,
no matter when you die. Mortgage term insurance is designed to pay off
whatever remains of your mortgage loan if you die.

Term life insurance meets the financial needs created by the untimely death
of an income earner or carer, and whole of life does the same in the initial
stages, then becomes an investment product to provide financial security for
children or others.
Critical Illness insurance
If you, or those who depend on you, would face financial difficulties if you
became critically ill (for example if you had cancer, a heart attack or a stroke),
you should consider taking out Critical Illness insurance.
If you’re critically ill, the last thing you’ll want is any financial worry like the fear
of losing your home because you can’t pay your mortgage. Critical Illness
insurance aims to give you peace of mind in these circumstances. It pays out
a lump sum if you are diagnosed with one of a specified list of critical
illnesses, or if you die.
Some Critical Illness insurance policies provide more comprehensive cover,
with a greater number of illnesses listed. It is important to check which critical
illnesses are covered by each policy. The ABI issued guidance in 2006 to
ensure that the most commonly covered illnesses are defined in the same,
clear way by all providers of this type of insurance.
Income Protection insurance (sometimes known as Permanent Health
Insurance)
Being too ill to work is likely to affect your earnings. Income Protection
insurance is designed to reduce the impact of this loss of earnings.
Income Protection insurance pays out a regular benefit, subject to certain
conditions, once you have been too ill to work for a period of time specified in
the policy. Some policies will pay this benefit until you can return to work or
reach retirement age, whichever is earlier, while others will pay it for a
specified length of time.
Payment Protection insurance (PPI)
PPI is designed to help you repay your debts (such as mortgages, loans and
credit cards) for a fixed period of time if you have an accident, become ill or
lose your job. Some policies will also cover your borrowing if you were to die,
meaning that those you leave behind have one less thing to think about.
PPI is a value product for many people who would not otherwise have any
other protection for their debt should they find themselves without an income.

There are many types of PPI policies and the level of cover can differ from
policy to policy. Always read the policy summary for details of the benefits and
the main exclusions. The ABI has published a consumer guide on PPI which
can be found on the ABI’s website, www.abi.org.uk.
When buying protection insurance, the ABI recommends that you
should:
• Consider what you would need to cover if you were to become ill or be
out of work. And then choose the best product or products for your
needs.
• Shop around for the best policy – don’t just buy on price, also consider
the level of cover you require.
• Read all the details and terms and conditions of your policy. It is
important to know exactly what you are covered and not covered for.
If you are having difficultly deciding which products are best for your needs,
you may want to consider using an Independent Financial Adviser or an
insurance broker.
When taking out any of these insurance products it is essential that you
answer all the questions in the application about your medical history
carefully, accurately and to the best of your knowledge and belief. Nondisclosure
of medical details that are relevant to the application could lead to
a reduced payout or, in extreme circumstances, a claim being turned down.
Application forms have recently been made easier for customers to complete
so that they capture the right medical information.
The ABI recently announced that insurance companies will pay more claims
for Critical Illness, Income Protection and life insurance where medical
information has not been disclosed, unless the customer deliberately withheld
it. This important new commitment will lead to a further fall in the number of
declined claims.
Where relevant information has not been provided, insurers will pay
customers a fair sum, reflecting risk and premiums paid. In a small number of
exceptional cases, premiums will be refunded if the insurer would not have
taken on the policy if they had known the full facts. Fraudulent non-disclosure
will always lead to a claim being turned down, and could lead to prosecution.
For more information and advice on insurance products, visit the ABI web site
at www.abi.org.uk.
ABI, 2008