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Life Insurance Cover

What types of life insurance cover are there?

Although they work in different ways, they all have similar aims – to offer you and your family financial peace of mind and to help you protect your future.

Life Insurance

Covers against: Death
Type of benefit paid: Lump sum
Life insurance, also known as term insurance. Life assurance will provide a sum of money in the event of death during the term of the policy. This cash lump sum is paid tax free and can be used by your dependents however they choose.
There are two main ways in which this cover is arranged:
A Level Term Assurance policy is where the amount of cover (also known as the “sum assured”) stays the same throughout the length of the policy. Both the sum assured and the term are set at the start of the policy. Level term assurance is often taken out to help pay off a mortgage and is most suited to interest only mortgages, where the amount owed does not decrease over time.
A Decreasing Term Assurance policy also pays out a cash lump sum in the event of death, however the amount paid out decreases over time. These policies are usually taken alongside a repayment mortgage so that the amount paid out is the same as the amount left on the mortgage. As the amount of cover decreases over time, the premiums for decreasing cover are typically cheaper than they are for level term cover.

Critical Illness Insurance

Covers against: Serious illness or injury
Type of benefit paid: Lump sum or regular income
Critical illness insurance will provide a tax free cash sum in the event that you are diagnosed with one of a set list of critical illnesses (most policies cover 30-40) where your diagnosis meet the provider’s definition. This cash sum can be used however you need to use it, it could be used to clear a mortgage or it could be used to replace a lost income, to pay for private treatment or for whatever else you feel is required. Essentially it is there to make a really difficult time a little bit financially easier. It would allow you to concentrate on what is really important, getting better and spending time with the family, rather than worrying about the money side of life.
Like life cover, critical illness cover can be a fixed (or “Level”) lump sum or can fall in line with your mortgage balance (“Decreasing”) and you can either take it along side life cover or as a standalone option. You don’t even need to fully cover the mortgage balance if your budget is tight, after all some cover in the event of serious illness is better than none. There are differences between providers regarding their definitions and the additional benefits that are available so it is not just a question of looking for the cheapest policy, but making sure you have the best level of cover you can get for your budget.

Income Protection

Covers against: Illness or injury
Type of benefit paid: Regular income
An Income Protection policy pays out a monthly income to replace a proportion of your salary in the event that you are unable to work as a result of an accident or sickness. It will pay out after a set amount of time has passed (decided by you at the start of the policy) and will continue to pay until you are either well enough to return to work, you reach retirement age or the end of the policy term. This means that you have the peace of mind of a regular on-going income to maintain your lifestyle should you fall ill, or have an accident and need to take time off work. Importantly, this income cannot be affected by state benefit cuts.

Family Income Benefit

Covers against: Death
Type of benefit paid: Regular income
Family Income Benefit is designed to pay out an amount of cover in the event of death, but instead of providing a one-off cash lump sum like standard life insurance, it pays a regular, tax-free income until the end of the policy term. This can be a suitable option for people who would prefer that their dependants receive a regular income, rather than have to decide what to do with a one-off lump sum.
The term of the policy can be chosen to fit your family’s circumstances; for example to take your youngest child to age 18 or 21 and the amount of cover you chose can be linked to inflation to ensure that, in the event of a claim, the benefit keeps its real value and spending power. Family Income Benefit is a relatively affordable way of ensuring that your family can maintain the lifestyle you want them to have, whether you are around or not.

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