Personal and Family Protection

We advise individuals from all backgrounds on how to arrange effective insurance cover to protect against a range of catastrophe events. The following is an outline of our approach.

Permanent Health Insurance (PHI)

This is generally the starting point of any financial planning process. Permanent Health Insurance, as it is called, is designed to provide you with salary/earnings continuation, with the benefit generally payable monthly to age 60 or 65, in the event that you are unable to work as a result of accident or illness. This cover is vital to ensure that bills can continue to be paid in the event that disability strikes, preventing you from earning a living. Realistically, it is cover that most working individuals cannot afford to be without.

If you are an employee, disability cover will often (though not always) be provided by your employer, removing or reducing the need to buy cover personally. If you are self-employed, however, (or in employment where such cover is not provided as a matter of course) you will need to take responsibility yourself for arranging this type of insurance.

Tax treatment of benefits

Under an insured company sponsored group PHI scheme, income benefits would normally be paid under a group policy to the employer as the beneficiary. The employer would then pay the benefit to the employee which would be treated as salary and subject therefore to the usual income tax and National Insurance considerations.

Where a PHI policy is effected by an individual personally (for example, where you are self-employed), the benefits are paid by the insurance company direct to the claimant and are now tax-free.

Amount of benefit

PHI insurers are only prepared insure up to a certain % of pre-disability earnings (broadly up to a maximum 75% of earnings under a group scheme for employees, and up to 50% of earnings for a personal policy). All insurers will have a ceiling on the maximum absolute level of benefit they are prepared to cover. The cover is designed to provide a reasonable proportion of pre-disability earnings.

When does the benefit become payable?

Policy conditions vary slightly from insurer to insurer. However, as a PHI policyholder, your claim for benefit will typically be met if you find yourself "unable by reason of illness or injury to perform the material and substantial duties of your occupation." "Material and substantial duties" means those duties normally required to carry out your occupation and which cannot reasonably be omitted or modified by you or your employer. The benefit under a PHI scheme or policy will commence once a pre-agreed "deferred period" has elapsed (i.e. a continuous period of disability). This period, (generally 3, 6 or 12 months), must be agreed at the outset with the insurer - the shorter the deferred period selected, the more expensive the cover will be.

Our experience

We have set up and run several large group PHI schemes for employers as well as advised on a large number of individual policies for private clients. We have significant experience of the insurance marketplace in this area and have been involved in the settlement of 7 successful PHI claims (out of 8 presented) in the past 5 years. We can help you to ensure that you have the right cover in place to meet your needs.

Life Assurance Cover

Typically, this provides you (or, more accurately, your beneficiaries) with the benefit of a lump sum payment in the event of your death. Life assurance cover, like PHI cover, is personal insurance cover which few of us can afford to be without although there will be periods in our life when the need for life cover will be at its most pressing (e.g. when families are young and mortgage commitments are heavy - generally in the earlier stages of our working life).

How much cover should I have?

This decision should be based on whether you have financial dependants (current or prospective), what your assets are, what borrowings you are carrying together with other liabilities and, inevitably, will be influenced by the cost. This will be affected by your age, your sex, whether you are a smoker and your general state of health. As a rule of thumb (not set in stone), exclusive of mortgage related cover (but inclusive of free assets outside the main residence), we believe that individuals should regard 10 x salary as an appropriate target sum assured benchmark figure to aim at. For employees, some (or perhaps all) of this may already be provided under an employer-sponsored death-in-service scheme. For the self-employed, however, no such safety net exists and life cover must be added to their list of insurance requirements along with car, buildings and house contents insurance.

Underwriting issues

PHI and life assurance cover will be provided at a prescribed cost (determined by the insurer by reference to age, sex and smoking habits) but this cost (often described as "normal premium rates") will be subject to loadings/policy exclusions where your medical history is poor or where you take part in hazardous pursuits. As examples, motor racing, flying as a private pilot and mountaineering would all give rise to potential premium loadings under the heading of "hazardous pursuits". Similarly, if you have suffered in the past from heart disease, cancer or diabetes, as examples, you are also likely to find insurance cover more expensive to obtain. In some cases, the insurer will decline taking on the risk altogether.

Where cover is provided under an employer sponsored group scheme, this can have potentially significant underwriting advantages as insurers are generally prepared to offer levels of life assurance and PHI cover, up to generous limits, without the need for you to submit medical evidence. Very often, membership of an employer-sponsored scheme is the only way an individual with a poor medical history can ever secure meaningful levels of life assurance and PHI cover.

What can IAS do for me?

• We will look at your existing insurance cover and advise you whether we think you are adequately covered in these areas.
  
  
• We will also tell you if we regard your existing cover to be either inappropriate or overpriced.
  
  
• We will make policy recommendations where appropriate and deal with the proposal documentation with you, including arranging medical examinations where these may be required by the insurer.
  
  
• We will advise you on what policy exclusions, if any, apply under the policy and will recommend policies where exclusions are minimised.
  
  
• Where life policies are concerned, we will advise you on how to ensure that the policy proceeds end up tax-free (and without delay) in the hands of intended beneficiaries.
  
  It is generally advisable to set up individual life cover in conjunction with life assurance policy trusts. Most insurance companies provide off-the-peg flexible trusts that will satisfy most requirements and we will advise on suitable trust wordings. The payment of employer-sponsored life assurance benefits is generally subject to a discretionary trust under occupational pensions legislation, enabling benefits to be paid at the scheme trustees' discretion to intended beneficiaries.
  
  
• Finally, we will be here to assist you or prospective beneficiaries in the prompt handling and settlement of a claim.

Inheritance Tax Planning - Related Insurance Planning Issues

At present, inheritance tax (IHT) is paid by a person's estate at a flat rate of 40% on the value of the estate in excess of a certain threshold (known as the "nil rate band"). For The tax year 2001/02, the threshold is £242,000. (Importantly, inheritance tax is not charged on transfers between spouses). However, an individual wishing to pass on an estate worth £500,000 to children (comprising perhaps £350,000 house value and £150,000 investments) will find that £103,200 will end up in the taxman's pocket, under the regime applying in 2001/02.

To the extent that avoiding this tax is affordable, it is possible to mitigate the impact of IHT by giving away assets prior to death. For IHT computation purposes, certain relatively small gifts fall out of the estate immediately, once made. Larger gifts, however, known as "potentially exempt transfers" (PETs), fall back into the estate for IHT computation purposes, should the donor die within 7 years of making the gift.

Insurance can sometimes play a part in covering this "7 year risk" so-called - individuals need to weigh the cost of the insurance premiums against the risk of having to meet the additional inheritance tax which would fall due in the event of the donor failing to survive the gift for the 7 year period.

Occasionally, individuals may wish to consider effecting whole of life insurance, paying premiums into a policy to secure a sum assured, written in trust for designated beneficiaries, designed to meet or go towards meeting the eventual inheritance tax bill. In a sense, this is akin to the policyholder meeting his own inheritance bill in installments!

We can advise on the merit of insurance-related solutions to IHT - related problems, where these arise. Often, we are called upon to advise in this area in conjunction with other professional advisors.

Critical Illness Insurance

Critical illness insurance is a relative newcomer to the UK, the concept having crossed the Atlantic in the late 1980's. In essence, a critical illness policy will pay out a lump sum benefit in cases where the policyholder suffers from one of a list of prescribed conditions, provided the underwriter's specific medical criteria are met. A "heart attack", for example, is one of the core conditions covered under such policies. However, a holder of a critical illness policy who suffers a heart attack would only be able to make a successful claim under the policy if the attack met the test of severity, as measured by the level of certain enzymes in the blood.

Some advisors regard critical illness cover to be worthwhile. Others regard it as too expensive and too potentially restrictive to be worth buying in most instances. We might be more inclined to the latter view although would concede that the case for buying the cover for loan protection purposes has some merit, especially if the loan is of a size which could not realistically be serviced easily on a reduced disability income.

Critical illness policy conditions have benefited over the past 10 years from a degree of industry-wide standardization - certain so-called "core" critical illnesses are now covered as standard with additional conditions covered (at extra cost) should a policyholder choose to extend the range of conditions covered. (Heart attack, Cancer, Stroke, Major Organ Transplant, Paralysis, Multiple Sclerosis and Terminal Illness are now the core conditions covered under such policies).

Ultimately, the decision whether or not to spend resources on such cover is a personal one - although we might be inclined to regard critical illness cover as one insurance cost too many, (and hence might be inclined to live without such cover) at the end of the day, we recognize that others might take a different view. Ultimately, like many decisions taken in the arena of personal finance, personal judgement and preference will come into play in deciding on whether the extra cost of critical illness cover (on top of the cost of life cover and permanent health insurance) is necessarily the wisest use of limited resources.

Long Term Care Insurance

This is designed to secure a prescribed level of nursing home fees, should you find yourself needing nursing home care. The level of fees secured will depend on your age at the time the cover is effected and the lump sum you are prepared to commit up front. This lump sum is generally not refundable - it should be regarded as a pure insurance premium. The U.K market for long term care policies is still very small and undeveloped.

The question as to whether it makes sense insuring the future risk of needing such care has been thrown into confusion by the different views held by different governments as to the level of State assistance that should be provided, and how this very sensitive issue should be handled with the electorate.

The cost of State care is made up of three elements:

1. The cost of nursing care-tasks that should be undertaken, supervised or delegated by a registered nurse such as assistance with changing or dressing.
   
   
2. The cost of personal care-tasks that do not involve a registered nurse but can be undertaken by a care assistant such as washing, bathing and skin care.
   
   
3. The cost of accommodation if you cannot be cared for in your own home or the cost of help with domestic tasks in your own home.

Nursing care has always been free unless it is provided in a nursing home. The Royal Commission recommended that both nursing care and personal care should be funded by the State. This was rejected by the Government and instead they have introduced free nursing care in a nursing home from October 2001 (the precise definition of nursing care is still open to debate). Nursing/personal care provided by NHS in the person's own home remains free but there is widespread differences in the level and definition of personal and domestic care provided by local authorities.

In addition, the new rules propose some changes to the means testing limits which apply in deciding whether an individual must fund their own long term care costs. If the individual has total assets of more than £18,500 they must pay their own costs. If they have total assets of between £11,500 and £18,500 they must help with care costs (based on all their income and a proportion of their savings, using a complex formula).

Total assets for practical purposes includes all forms of savings and investments and includes the individuals own home except when a qualifying dependent still lives in the home (this will not be included in mean test for a period of three months). The home is excluded for the purposes of assessing domestic care in own home. Average cost of nursing care in the U.K. is now £20,000 per annum.

If you wish to insure the risk of long term care, policies are now available under which you can pay either regular premiums or a lumps sum. In return you will obtain a policy that will help you to meet the costs of care up to an agreed limit. You are effectively pre- funding by securing the cover before it is needed. The policies pay out when you need nursing home care either in your own home or in a care home. To judge whether or not you need care the insurer will measure the state of your health against a list of "activities of daily living". If you are unable to do 2-3 of these activities you will be eligible to make a claim under the policy.

As with most forms of insurance what you'll pay for cover depends upon your age, sex, state of health and the level of cover you require.

We remain unconvinced overall that the cost of long-term care insurance can be said to offer compellingly attractive benefits, especially when it is by no means clear what the State might or might not agree to fund in years to come. The present status quo, whereby those living in Scotland are more heavily subsidized when it comes to long-term care than those living in England is not likely to be politically sustainable, in our view and pressure will continue to apply to the U.K. government to have uniform rules across the country.

Furthermore, those that can afford to insure meaningful levels of care benefit will be the wealthy, who, should the need arise, will generally be able to meet the cost of their care (even in retirement) out of net income, without denuding potential inheritances. Those at the poorer end of the scale can seldom afford the luxury of this type of insurance, even if they felt it might be worth considering. Those in the middle, for whom a spell in a residential nursing home could well mean spending the inheritance they had hoped to pass on to children, will still need to think very carefully about giving up capital in order to insure a liability which may never arise and which might, in any event, be met largely by the State, should the current status quo change.