Protection Insurance
:: Life Insurance Guide
A Guide to Life Insurance
Life insurance (also called Life Assurance) is a way of financially
protecting your family should you die.
The most frequent reasons people take out life cover are to
pay off debts upon their death - such as a mortgage - or to
provide a lump sum payment when they die to their dependents
(thus ensuring their dependents are financially secure).
Usually sold as a single or joint life policy, there are many
different types of life insurance contracts available.
Term Assurance
The simplest form of life cover, term assurance policies provide
a pre-determined level of cover (the "sum insured"),
based on the premium payable.
There is no investment in the policy, therefore, should the
insured survive the policy term (the length of time that you
wish the policy to cover), they will not get any money back.
There are various different Term Assurance contracts, providing
flexibility to meet a person's needs and circumstances.
The typical policy term would be 15 - 20 years.
Level Term Assurance
The cheapest form of life cover, Level Term assurance is where
the premiums remain unchanged throughout the policy term, providing
a pre-determined level of cover.
The policy has no surrender value, nor provides a 'maturity'
value should the insured survive the term.
Increasing Term Assurance
This policy allows the amount of life cover to increase, either
by a fixed amount or a percentage. Some contracts have an option
where the sum insured can be increased without evidence of health
being provided (such as the birth of a child, marriage, promotion).
The premiums can be level or they may rise when the sum insured
increases.
Decreasing Term Assurance
Under this contract, the sum insured reduces over the term
of the policy. There two most common types of Decreasing Term
Assurance:
a. Mortgage Protection - the level of cover reduces in line
with the reducing loan on a repayment mortgage
b. Decreasing Term Assurance - The sum insured reduces each
year over the term of the policy by a fixed amount
Additional options with the Decreasing Term policy include
Convertible and Renewable Terms (see below).
Convertible Term Assurance
This policy gives an option at the end of the term to convert
into a permanent policy such as an Endowment or Whole Life policy,
without having to provide further medical evidence.
This means that you are guaranteed insurability even if you
have suffered a major illness prior to taking up the option.
The new policy will be on the same terms as the original contract,
with the premiums based on your current age.
Renewable Term
These policies tend to run for a short term - 5 to 10 years
- with the option of extension at the end of the term. (The
renewable feature expires when the insured reaches a pre-determined
age, such as 65 or 70).
Family Income Benefit
In the event of the insured's death, the Family Income Benefit
policy pays out a regular tax free income for his or her dependants
for the remainder of the plan term.
For example, if a £10,000 per annum family income benefit plan
over 25 years is selected, and the insured dies at the end of
year 8, then their dependants will receive £10,000 every year
for the remainder of the term i.e. 17 years
The amount of income benefit usually remains level over the
term of the plan, although, as an optional extra, benefits can
increase in line with inflation.
Critical Illess Insurance
Also known as 'Serious Illness Insurance', this contract pays
out a tax-free lump sum if you are diagnosed with one of a number
of specified 'critical' illnesses during the term of the policy
(eg heart attack or stroke - see list below).
The lump sum payment can be used for anything you want but
most people use it to provide an income if they become too ill
to continue working. Other uses may be to pay off a debt, such
as a mortgage, or if necessary, adapt your home.
Most companies offer policies which cover you for death and
critical illness, though it should be noted that normally the
policy will cease if you claim on the critical illness aspect
(ie you will no longer have life cover).
What should I consider when selecting a Life Insurance policy?
The sum insured
Calculate how much money would be needed in the event of your
death to pay off all your debts plus how much income your dependents
would require to continue the same lifestyle they currently
enjoy.
Or, for a more generalised guide then, consider insuring your
life for between 5 and 10 times your current net salary after
tax.
If you are using life insurance to cover the repayment of a
mortgage, the initial sum insured must equal the value currently
outstanding on your mortgage.
The Policy Term
Once you have decided on the value of cover you need, the
next step is to decide how long you wish to be covered by the
insurance.
In other circumstances, the Term is a personal decision but
your age should be an important influence. You should note that
the minimum Term is usually 5 years and most people select a
Term between 10 and 25 years.
Do you want the sum insured to be increased automatically in
line with inflation ie an "indexed" policy?
Indexation is an optional extra and your monthly premiums will
increase each year in line with the adjustment made by your
Insurance Company.
Life policies that provide an increasing sum insured are called
'Increasing Term Insurance'; policies that provide a constant
sum insured are known as 'Level Term Insurance'.
Finally, you should always read the Key Features Document for
a Life Insurance policy to ensure you understand exactly what
you will be insured for and any restrictions that may apply.
(eg a common restriction is death caused by being involved in
a hazardous pursuit.)
