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It may well happen to you.


Hardly a week goes by without a bigwig in the government or the financial services industry bemoaning some shortfall or other in people's personal financial provision. One minute we're being told the "savings gap" is pounds 27 billion, the next that the "pensions gap" is pounds 75 billion.

However, all these so-called "gaps" pale into insignificance compared with the "protection gap" - the shortfall between the amount of life, critical illness and income protection insurance needed to protect family finances and the amount actually purchased.

According to figures released by leading life assurance company Swiss Re, the protection gap is a staggering pounds 2.3 trillion and less than half the UK population has any form of life insurance protection.

And this situation is not getting any better. The protection gap has been increasing over the last five years, despite premiums falling generally over this time.

Some experts say the main barrier to people taking out protection policies is basic human nature. People don't like to talk about death, disability or debilitating illness relating to themselves. So the argument runs.

I suspect that this is only a small issue for most people and that the complexity and personal nature of application forms, distrust of the claims procedure and the "it won't happen to me" mentality are other factors that have much more bearing.

Of the more than 1,000 consumers surveyed by Swiss Re, around 81 per cent felt their household would be "well" or "reasonably" positioned financially in the event of a death, disability or long term illness.

But research from Combined Insurance this year suggests UK workers only have sufficient savings to cover living costs for just 18 days.

Mark Johnson, head of marketing at Swiss Re Life and Health, said: "People think they're better covered than they are."

This reveals a fairly fundamental misconception of the reasons for taking out life insurance and other protection policies. But it also illustrates the confusing nature of the range of protection policies available, even though the policies in themselves are fairly straightforward.

Most of us who have a mortgage will have a life insurance policy alongside it, either level term or decreasing term insurance. It's fairly clear to see what this is for. If you were to die during the term of your mortgage, it would be paid off by a lump sum from the policy, leaving your spouse and children free to live in the family home.

However, they will no longer be receiving the income you were providing during your lifetime. Your family may have a home, but will they be able to afford to live in it? Additional life cover can provide a replacement income. This can be either as a lump sum payout from a level term insurance, that can be invested to help support the family. Or it can come in the form a Family Income Benefit policy that will pay out a set income each year.

Equally, if you were to become seriously ill for an extended period how long would your employer provide sick pay and how long would your savings last? Relying on the state would seriously curtail your income in these circumstances.

Income Protection or Permanent Health Insurance can provide a longterm replacement income in the event of long-term illness.

Critical illness cover will pay out a lump sum on contracting and surviving a serious illness, such as cancer or heart attack. This can be used to pay off a mortgage, alter your home if any changes need to be made to cater for your illness, or to pay for long-term care.

The basic level of protection ought to be term insurance to pay off your mortgage plus further life insurance to provide replacement income for the family.

Many people's first port of call for protection policies is the internet. This is fine if you want cheap, basic life cover.

However, you may struggle to find a lot of information on or a quote for Family Income or Income Protection policies.

Internet sources are also unlikely to point out that a couple would be better advised to take out a single life policy each rather than a joint life policy - the single policy option provides continuity of cover and also a double payout in the event of both partners dying at the same time. Also worth heeding are the advantages of writing the policies in trust to remove them from inheritance tax liability.

The costs of closing the protection gap are not as prohibitive as many imagine.

A 25-year term single life policy to pay out pounds 250,000 on death for a non-smoking male aged 30 would cost about pounds 15 a month or pounds 12 for a woman.

This would provide an income of about pounds 15,000 a year. Add critical illness cover and you are talking about pounds 55 a month for a man - less than the cost of buying a pint or beer or glass of wine every day.

How valid is the "it won't happen to me" syndrome? Reinsurer Munich Re says that there is a one in 12 chance that there will be a claim relating to the 30-year-old male we have mentioned before he reaches the age of 65.

Also government statistics list the main reason for mortgage arrears as loss of earnings due to sickness - a situation that could be avoided with an income protection policy.

Trevor Law is a director with Montpelier Group (Europe) Ltd, the privately-owned independent financial advisers located at Barston near Solihull. Email:

The costs of closing the protection gap are not as prohibitive as many imagine
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Title Annotation:Business
Publication:The Birmingham Post (England)
Date:Jun 17, 2006
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