Protecting your life:

Life Assurance, also known as Life Insurance is an insurance policy that pays out an agreed sum of money if you die, but has no value if you don’t.

There are several different types of policy under this general heading.

Level term assurance (LTA): This policy pays out a guaranteed sum of money if you die within an agreed period of years (the term). For example you could take out a level term policy for £100,000 over 10 years. If you die any time within the 10 years you will receive £100,000 but if you die after that time you will not receive any money.

Decreasing term assurance (DTA): This policy pays out a sum of money if you die within an agreed period of years (the term) but the sum of money reduces over time. If you die after that time you will not receive any money.

Mortgage protection insurance: This is the most common form of decreasing term assurance and is a type of policy put in place to cover the mortgage balance outstanding on are payment or capital and interest mortgage, where the amount of money owed on the mortgage reduces over the term of the mortgage.  For example if you borrow £100,000 over 25 years on a capital and interest mortgage, you will owe £100,000 on day one and nothing at the end of 25 years when you have repaid your mortgage in full. The insurance policy therefore reduces in line with the mortgage, assuming a uniform interest rate. Actually, the common rate assumed by the insurance company is 8%, which is significantly higher than current average mortgage rates and so will guarantee that if you die within the 25 year term, the policy proceeds will be more than enough to repay the outstanding mortgage, as long as the repayments have always been made and there are no arrears.

Increasing term assurance: This policy pays out a lump sum that increases every year by an amount agreed at the start if you die within an agreed period of years (the term) . The increase is typically a set per cent, for example 2 percent, 3 per cent or 4 per cent, or could be linked to the retail price index. ‘Increasing’ cover means that the lump sum should keep pace with the increasing cost of living over the term of the policy.

Family Income Benefit (FIB): Instead of paying out a lump sum if you die within an agreed period of years (the term), it pays an agreed annual ‘income’ for each of the years remaining within the term. For example, if the FIB is set up to pay £24,000 a year over 20 years, if you died in the first year, you will receive 19 annual payments of £24,000. However, if you die with only one year remaining of the term, you will only receive one annual payment of £24,000.

Renewable term assurance: Typically short term Life insurance that can be renewed, without medical underwriting, every 5 – 10 years. However, premiums will increase each time the policy is renewed so although the cover is less expensive initially, it is normally more expensive in the long run.

Critical illness cover: This policy pays out a lump sum if you are diagnosed with a ‘critical illness’ which is a very serious illness specified by the policy, such as cancer, heart attack or Alzheimer’s disease resulting in permanent symptoms before you are 64. The most cost effective way to buy this insurance is to take out a ‘life or earlier critical illness’ option which means that the lump sum will be paid out either if you are diagnosed with a relevant serious illness or if you die within the agreed period of time (term)

Whole of life policy: This policy is guaranteed to pay out a lump sum when you die as long as you maintain the premiums in line with the policy rules. As the policy is designed to guarantee a cash payment, the premiums are more expensive than for products for an agreed ‘term’ where no payment is made if you survive the term.

Guaranteed over 50s insurance policy: This is a type of whole of life policy that will pay out an agreed lump sum on the death of the policy holder who must be aged 50 or over at the time of taking out the policy.

Protecting yourself if you are ill but do not necessarily die

Critical illness cover: This policy pays out a lump sum if you are diagnosed with a ‘critical illness’ which is a very serious illness specified by the policy, such as cancer, heart attack or Alzheimer’s disease resulting in permanent symptoms before you are 64. The most cost effective way to buy this insurance is to take out a ‘life or earlier critical illness’ option which means that the lump sum will be paid out either if you are diagnosed with a relevant serious illness or if you die within the agreed period of time (term)

Long term Income Protection, also known as Permanent Health Insurance: This policy provides a tax-free replacement income in the event of your not being able to work through ill health. The income lasts until you either return to work, die, or the policy term expires. Your health is assessed when you take out the policy, so if the application is accepted, all your existing medical conditions will be covered.

Mortgage Protection Insurance or Accident Sickness and Unemployment (ASU): This policy will pay a monthly benefit equal to a maximum of 150% of your mortgage payment up to a period of 12 or 24 months (depending on the provider) if you meet the accident, sickness and unemployment rules of the policy. It can only be used if you have a mortgage and the medical assessment is made when you claim, so often any medical condition you had when you took the policy out is not covered. Usually the policy can be taken with or without the unemployment option or some Providers offer the unemployment option only.

Payment Protection Insurance (PPI): This policy will pay a monthly benefit to cover any creditor payments such as loans or credit cards. It can only be used if the credit is outstanding and the medical assessment is made when you claim, so often any medical condition you had when you took the policy out is not covered.

Short term Income and unemployment Protection: This policy will pay a monthly benefit equal to a maximum of 60% of your income up to a period of 12 or 24 months (depending on the provider) if you meet the accident and sickness and unemployment rules of the policy. The medical assessment is made when you claim, so often any medical condition you had when you took the policy out is not covered. Usually the policy can be taken with or without the unemployment option or some Providers offer the unemployment option only.

Additional options

Guaranteed premiums: The premium to arrange the cover will stay the same throughout the period of cover.

Reviewable premiums: The premiums will be ‘reviewed’ at periods agreed at the start of the policy (usually every five years) and may change either by increasing or decreasing.

Increasing premiums: Premiums increase at an amount agreed at the start of the policy, usually for Increasing Term Assurance products in line with the increasing benefits. There are also offer a ‘low start’ option where the benefit stays the same, but premiums start low and go up over a period of years to help applicants on an initially low income where they expect their salary to increase over time.

Waiver of premium: An additional option on all insurance policies that means that the premiums will be paid on your behalf during periods of illness.

Total Permanent Disability cover: This is an ‘add on’ benefit to Critical Illness Cover that is designed to cover other chronic conditions and circumstances that are not included under the main Critical Illness Cover. For example, osteoarthritis may result in gradually increasing symptoms eventually leading to the permanent inability to work or carry out day to day activities. When recovery is not expected, a Total and Permanent Disability Cover claim may be paid. Different definitions of disability are used for this type of cover, depending on your age and circumstances.

Trusts: While there are many variations, a trust is normally a very simple legal instrument that causes the proceeds of the policy to be paidswiftly and without any tax to those you want to benefit. It avoids all delays connected with probate, wills and the lack of them.

Cooling off period: You can cancel within 30 days of taking out the policy and get your money back – provided you have not made a claim. After the first 30 days, you can still cancel the policy at any time under most contracts, but you may not be entitled to a refund of the premiums you have paid. Your cancellation rights should also be set out in the key policy information.