Types Of Cover
Types Of Cover
Emma Walker (Protections Health Manager) gives expert video advice on: What is critical illness cover?; How can I lower my premiums? and more...
What different types of life insurance are there?
There are lots of different types of life insurance available. There's what's called term insurance, which is the cheapest form of life insurance. That has no cash involved at any point. It's basically designed to pay out if ever you need to make a claim. You can also get life insurance which is designed just for funeral expenses. You can also get life insurance which is called whole of life which has an investment component to it and may give you some cash back if ever you do need it.
What is level term insurance?
If you have a policy which is called level term insurance, what it means is that whatever your sum assured is, for example, 100,000 pounds, it will pay 100,000 pounds if there's a claim in the first year or in the last year. It will always remain perfectly level. What you need to remember with a level term insurance policy though is if you take it out to protect your family. What might seem a lot of money now, for example 100,000 pounds, in fifteen, twenty years time, it probably won't be the same in relative terms. It will have been eroded by inflation, so it's very important that you consider taking out something called indexation so that you can make sure that your level term insurance increases in value each year.
What is decreasing term life insurance?
If you buy a policy called decreasing term insurance, this will actually mean you have taken it out to protect your mortgage. So decreasing term insurance actually decreases in line with your mortgage as it reduces. For example, if you've got a cap on your repayment mortgage for 150,000 pounds, every year you'll pay some off and your mortgage balance will reduce. And in line with that, so will your decreasing term insurance. Whatever point you need to claim to pay with the policy, that will be the amount to pay off - whatever's remaining on the mortgage balance. If you needed to claim the last year of the policy, you might for example only have 5,000 or 10,000 pounds left on your mortgage, it will only pay that out.
What is renewable term insurance?
When you buy life insurance, there is an option for certain policies to have what's called an renewable option. What that basically means is that when you get to the end of the policy, you can actually renew that policy for the same sum insured with no further medical underwriting. But the new premium will actually be at the age you are then. So, what it means is that if you have a ten year policy that comes to an end, you will actually have the option to basically renew that policy again with no paperwork or any further application. What you do need to bear in mind is it will cost you more the second time around.
What is convertible term insurance?
Convertible term insurance is a box on the life insurance policy that normally costs you about ten percent more. The reason that you're paying ten percent more is that you're able to actually convert that into a whole of life policy or endowment policy if ever you do need to do so. What you do need to remember, though, is that you can't convert it for a higher sum than insured. If you do need to so, you will have to have further medical underwriting. If you want to keep it at exactly the same value, you can do that simply by informing the insurer and they'll switch it for you.
What is Increasing term insurance?
Increasing term insurance is normal life insurance, but life insurance that each year will increase in value. This is particularly good if you're very conscious about having a policy that remains in line with inflation. If you take a hundred thousand pounds out, for example, every year it will increase either by a certain percentage or by the rate of inflation, dependant by what you agreed with the insurer at point of application.
What is index linked term insurance?
Index linked term insurance is normal term insurance. It pays up upon the event of death. The difference is that the policy value will increase each year in line with inflation. This is very important if the money is there to protect your family, or to make sure they have some assured if you were to pass away. Every year it will increase with inflation. For example, if you take out a 150,000 pound policy out today, that might seem a lot of money, but in twenty years time it will not have the same value as it has today. That's why by index linking it, you're always making sure it will buy you exactly the same as what it will buy you today.
What is endowment life insurance?
Endowment life insurance. If you have an endowment, it's a form of investment which everyone runs alongside a mortgage. At the end of that period, what you hope will happen is that there'll be enough money in the investment to pay off what is left of your mortgage. Within an endowment, life insurance is built-in.
What is family income benefit?
A family income benefit policy aims to replace the income of a lost breadwinner as opposed to having a life insurance policy which pays out a lump sum. What it will mean is that your family would receive, every year or every month, dependent on what's been agreed with the insurer at the point of application, a tax-free payment. What's also good about it is that at the point of claim, the beneficiary can actually say to the insurer that they prefer to have that as a lump sum if they desired. However, that would be at discounted value.
Can I still get pension term insurance?
If you're looking to apply for pension term insurance now, unfortunately it's no longer available to apply for. It was actually redrawn at the last budget. However, if you do already have pension term insurance in place, do keep hold of it because you will be receiving tax-refunded premiums.
What is critical illness cover?
Critical illness cover is what I believe is one of the most important policies that you can ever take out. You can take it out on it's own, or you can take it out with life cover. What it does is it makes sure that you receive a lump-sum payment upon the event of being diagnosed with a critical illness, for example cancer, stroke, heart attack, something like that. For example, you might be diagnosed with cancer, which would be absolutely terrible for you. It may be that you're off work for six months, but then you do go back to work, which is fantastic. That may not be seen as absolutely serious. However, during that period of being ill, you've had emotional stress behind your family. You may have had to reduce your hours at work, you may have to even do, have a certain medical treatment that's cost you money. It's making sure that if the worst was to happen, you have got money there to provide you and your family with everything that you need at that important time. Luckily, we now live in a day and age when people who do suffer critical illnesses recover and can get back to their normal lives. Having that policy probably does mean that during that period you can pay off any debts that you do have.
Are there any illnesses not covered by critical illness cover?
If you take out a critical illness policy it will protect you for all of the main critical illnesses. However, there are going to be certain conditions that unfortunately mean that you won't be able to claim on that plan. If it's not within the plan, it probably does mean that it isn't actually a critical illness. For example, certain forms of diabetes aren't covered within there. Certain forms, more milder forms of cancer where perhaps you go into hospital, you have a minor operation and you can be in work with a week. It's very important with critical illness that you do really understand the definitions of the policy, and that you do seek advice. You should ask as many questions as you feel you need to do so, and if you are comparing products, that you do compare critical illness policies like for like because every provider will offer something slighty different. What you get with one provider, you may not get with another one.
What does Written in Trust' mean?
When you buy life insurance, you should have the option to place that policy in what's called a Trust. It is an absolutely fantastic thing to do, and something you must do. By placing a policy in trust, you're actually taking that money and moving it out of your estate and effectively, it's interest, into somebody else's name. The reason you should do this is, is at the point when if something should happen to you and your estate is all divided up then, the life insurance isn't part of that estate and therefore isn't liable for any inheritance tax. Also, it will probably get to your beneficiaries a lot quicker because it won't form part of your estate and therefore won't have to go through probate in the same way as the rest of your inheritance and estate would have to.
What is joint life insurance?
If you want joint life insurance, what that basically means is that you're looking for a policy that can be in two peoples names, and therefore if one of you were to pass away the other person would benefit from your name. What normally happens with the joint life insurance policy is that the money is payable upon the death of the first person to pass away. However, you can't check the option to have it that it pays out on the death of the second applicant, perhaps if you wanted to leave money for children. So if the husband and wife pass away, then the money would go to the children.
What is 'whole of life' insurance?
As the name suggest 'whole of life' insurance policy is designed to pay out to any stage in your life whenever you are to pass away. What it does mean though is that because it is guaranteed to pay out, should you keep the policy paid in full it will cost you more than if you took out a conventional term of insurance because you are definitely going to claim on it. There is a certain amount of investment element to a 'whole of life' policy as well. If you did actually cancel or stop the policy and you wanted to cash it in, you may get some return . It is always worth remembering that 'whole of life' policy is designed as a protection plan and not as an investment, so that any cash back you may get certainly in the earlier years isn't nearly as much as in the premiums that you have paid.
What are life insurance premiums?
Life insurance premiums are what you pay to the insurer every month for the life cover that you've got in place with them. You can sometimes pay annually, but normally it's monthly. You're paying this monthly premium, that is actually you telling the insurer "I want this policy enforced". If ever you don't pay your premium for whatever reason, there is a high possibility that that policy will actually be canceled or will lapse, and it will mean that your cover won't be enforced. Unfortunately, it's not as simple as going back to the provider and saying can I start again - they may actually want you to go through the application process.
What determines the cost of my premium?
When an insurer receives your application for life insurance, what they're going to be looking at is the various pieces of information that you've put on the application. What they're going to be looking at is how much of a risk you are, how likely you are to actually need to claim on that policy. For example, they'll be looking at things like your medical history, your height and weight, your occupation, whether you smoke or not, and all of those factors together will result in the final premium that you pay. What you may find, is that dependent on your circumstances, you may have what is called a loaded premium, which means you pay slightly more, or twice as much, for example, as what the original quote was for. You may think this means it's actually quite expensive, but the main thing is that you've got covered, and that is the absolute priority. If ever you do have a premium that is rated, always talk it through with your financial advisor. Don't feel inclined to want to cancel it, because it probably does mean that you are more likely to need to claim on that policy.
What are Guaranteed Premiums?
When you apply for Life Insurance there are two types of premiums that you can have. One of them is called Guaranteed Premiums. Guaranteed Premiums mean that whatever the premium is that you're accepted at, at the point of application is the premium that you'll pay every single month throughout the term of that policy. It will never ever change. Guaranteed premiums are great for people who like to budget. You want to make sure that their premiums always remain the same. It also means that if you take the policy out when you're quite young, and maybe your premium's 10 pounds, you'll still be paying that 15, 20 years into the policy, whereas if you actually went to apply at that stage you'd be paying an awful lot more.
Which is the better option guaranteed premiums or reviewable premiums?
When considering the premiums that you're going to be paying, and you decide between guaranteed or reviewable, it really depends on what your priority is. If you're looking to budget, keep your premium exactly the same all the time, you believe you're going to have that policy in force for quite a long time. I would recommend you go for guaranteed. If you are near the age when you want to play a lower premium and you don't mind seeing that that premium changes, then you can go for reviewable. It really just depends on what your priority is at the time. But always bear in mind, with reviewable, it will change.
What is income protection?
Income protection, as the name suggests, is exactly that. It actually protects your income if ever you were to be off work for a serious illness, or something's happened to you that prevents you from working, as long as it's defined under that policy. With income protection you can insure up to 50% of your income, with certain insurers up to 60%. The reason that you don't insure 100% of your income is: one, none of us actually receive 100% of our income because we pay tax anyway, so our net pay is always a lot less. Secondly, the insurer not only wants to help you to financially get back on your feet, but they want to help you get back to work. When you're applying for income protection, there can be various options that are available to you. The first thing will be how much you want to protect. Most insurers will offer you up to 50% of your annual gross salary. Some actually will allow you to apply for up to 60% of your annual salary. Also, one of the options available is at what point you want that policy to kick in, after you've been diagnosed with a serious illness. That could be up to four weeks after you're diagnosed, or it could be 12 months after you've been diagnosed. The longer you leave it, the cheaper the premiums will be. For example, you might get sick pay from your employer. You might get six months full pay. It's only after the six months that you would need an income replacement plan in place, because up to that point you actually will be okay. You can also choose when it stops. Most people would pick for their policy to stop when you get to retirement age, but your retirement age could be 50. It could be 60. It could be 65. What's also fantastic about income protection is that if you claim on it and then you go back to work and everything is absolutely fine, that policy remains in force and if you ever need to claim again, you can actually do so.