Life insurance is designed to pay out to your next of kin when you die. There are two types of life insurance: term and whole of life. Family Income Benefit is a form of life insurance. However, Critical Illness (often referred to as “life insurance for the living”) will pay out to you (the policy holder) upon diagnosis of a critical illness. Income Protection which covers accident and sickness will pay out after the qualification period to the policy owner.
To look at each of the above in a little more detail (more information can be found in the links to the left of the screen):
TERM INSURANCE – at the point of applying for the policy, a term (of say 25 years) would be attached to the policy. If no claim is made within this period of time, the policy would lapse. It is not normally possible to extend these types of policy, so some thought needs to be given to this before applying. Term insurance is often used to protect a mortgage (mortgage protection) and for personal or family protection.
WHOLE OF LIFE – as the name suggests, this type of life insurance will cover you for the whole of your life, and will pay out to your next of kin on your death, whenever that is. This type of policy is more expensive than term assurance, and is commonly used for funeral plans and inheritance tax planning.
LEVEL LIFE INSURANCE – this can be used to protect a mortgage (usually an interest only mortgage) and for family protection. At the outset of the policy you would select the sum assured which you want to be paid out in the event of your death. There are not set formulae for working this out, but in the case of a mortgage it may be the same amount as the mortgage loan, or in the event of life insurance for family protection you would need to work out how much you want paid out in the event of your death (your financial adviser can help you further with this).
DECREASNG LIFE INSURANCE – this is associated with a repayment mortgage and is often called mortgage protection. The sum assured would be set to the same amount of your mortgage balance, and would depreciate at roughly the same rate as your mortgage balance. In the event of your death, the sum paid out by the life assurance company could be used to repay your mortgage lender.
CRITICAL ILLNESS – this type of policy does not pay out if you die, but if you are diagnosed with one of a specified list of critical illnesses (which will vary from insurance company to insurance company). It is a term policy and would be set for a specified number of years, and can be coupled with life insurance or taken as a stand alone policy. The benefits of this type of cover should not be underestimated, but due to the fact that we are surviving more illnesses now than we were some few years ago, the cost of critical illness cover is higher than that for just life cover.
INCOME PROTECTION – this is an income replacement policy and will be set usually until retirement age. The policy will pay out to you after a set period of time (the deferred period) which would be after 4 weeks, 8 weeks, 13 weeks, 26 weeks or 52 weeks to allow for any period of time you may be paid full income or sick pay. Once a claim has been made, the insurance company will continue to make payments to you either until the policy expires or until you return to work. It is possible to make more than one claim against this type of policy. It is not possible to protect 100% of your income however (Government Legislation) or there would be no incentive for you to go back to work! The maximum protection available varies from company to company.
FAMILY INCOME BENEFIT – this is a life insurance, but rather than pay a lump sum of money in the event of a claim, it would pay an annual amount instead.
TRUSTS – in order to reduce or eliminate the risk of the Government taking 40% of your life insurance policy when a claim is made, you should consider placing the policy in trust. Each insurance company is able to provide a simple form to achieve this which will potentially protect the policy from inheritance tax and pay out delays associated with applying for Grant of Probate (or Letters of Administration if a Will has not be left). If you require advice in this specialised area however, you should speak to your legal representative.
There are a number of options which can be built into the above such as guaranteed premiums, reviewable premiums, waiver of premium, guaranteed insurability, terminal illness, total permanent disability, increasing policy, and so on. Our advisers will ensure that you understand all of the options associated with the type of insurance you are looking for so that you end up with a policy which best suits your needs.
Care should always be taken when choosing a life insurance policy to select one which truly covers your needs, as the last thing you want is for you to find, in the event of a crisis, that the policy does not cover what you thought it did. This is why it is best to seek independent advice. Our advice is free and our professionally qualified advisers will ensure your full needs are met. Choosing life insurance is certainly more complicated than just choosing the cheapest policy you can find!
