Life Insurance 101
All types of Life Insurance fall into one of the four groups explained below, which type you use depends on the type of risk you wish to protect and the funds you have available.
Cash lump sum paid out in the event of death
Straight term assurance is still a very cost-effective way of providing financial protection for the family or business. A lump sum is normally provided when a claim is made which is paid into the estate of the policyholder.
In order to avoid complications with delays in probate or inheritance tax, an appropriate trust can be used so that any payment is made direct to the beneficiaries.
It is also possible to have the cover indexed according to inflation, so that the level of cover remains the same in real terms. Since there is no element of saving, the plans do not acquire a surrender value. If you wish to include this option, you could opt for convertible term assurance.
Family Income Benefit
A regular income paid following death during the term of the plan
This type of plan provides for a regular income to be paid out in the event of the death of the life assured during the term of the policy. With each month that passes, the liability which the insurance companies is taking on decreases by a set amount. This enables the costs to be kept down to a minimum and is often the least expensive plan available.
The benefits can be written in trust to avoid legal delays and any possible
liability to inheritance tax.
This type of plan is also a term policy which covers the declining balance of a repayment mortgage. This enables the cost to be kept to a minimum but make sure that the interest rate figure is high enough for any possible increases in the mortgage rate.
Whole of Life Cover
Provides cover for the rest of your life
The main disadvantage of term cover is that at the end of the term, cover ceases and any new policy has to be underwritten according to the age and health of the policyholder at that time. When a whole of life policy is taken out, the policyholder has guaranteed insurability for the rest of their lives, regardless of any change in their health.
This means that initial premiums are likely to be higher than term assurance cover, but the plan has far more flexibility. It therefore depends on your personal circumstances as to which plan is likely to best suit your requirements.
Critical Illness Cover
Cash lump sum for those who die or have a critical illness
In recent years, the need for protection for those who actually survive serious illness or accident has become more apparent. It has been described as ‘life cover for the living’.
Most plans cover the common conditions such as heart attack, stroke and most forms of cancer, but there is variation on more rare conditions. In addition to specific illnesses, it is quite common to have permanent disability cover. If you become permanently disabled and unable to return to work, the plan pays out. There is however, a wide variation in the definition of ‘return to work. Some plans would only cover you if you were totally unable to work. Others have an own occupation? clause so that if you were unable to return to your normal occupation, a claim could be made. This is an extremely important fact to bear in mind when selecting your insurer.