There are many variations to the type of cover and protection policies you can get. It's important to investigate and ensure you have the policy that most suits your own personal needs.
Level Term Assurance
Level Term Assurance will retain the same level of cover from inception throughout the life of the policy.
Decreasing Term Life Assurance
Conversely, Decreasing Term Life Assurance (mortgage protection) provides life cover on a decreasing basis in line with a capital repayment schedule, usually the repayment of an individual’s mortgage. The rate of decrease each year is often directly linked to the interest rate assumed.
Critical Illness Cover
Critical Illness Cover can be taken out as a standalone policy or with life assurance. Critical Illness Cover will pay a lump sum benefit to the insured life or nominee on diagnosis of a number of specific critical illnesses e.g. Cancer, Stroke, Heart Attack, Blindness, Loss of a Limb etc. These policies tend to have higher premiums than life assurance policies as an individual is five times more likely to be diagnosed with a critical illness than die before the age of 65.
Whole of Life Assurance
Whole of Life Assurance is usually a combination of life assurance and investments that do not have a maturity date. Regular payments made to the policy are invested into a with profits or unit linked investment fund that will grow in line with the underlying assets held. Each month a premium will be deducted from the fund value to provide a certain level of cover. Therefore throughout the duration of the policy there could be a surrender value associated to the investment made.
Sum Assured – There is no limit to the amount of life cover that an individual can hold. However, the amount of existing death benefit cover will be taken into consideration when applying for a policy.
Single Life – The policy only covers a single life and will therefore only pay out in the event of the named individual’s death.
Joint Life – Two individuals are specified on the policy and the policy pays out once only on the death of either of the lives.
First Death/Event or Second Death/Event – On joint life policies if it available for the policy to pay out upon the first death/event or the second.
Policy Term – You can select a specific date for when the cover expires. This may be, for example, the maturity date of your mortgage or perhaps when a child should no longer be financially dependent, such as at age 18 or 21. However the premiums calculated will take into consideration the term of the policy and the increased likelihood of a payment of benefits which increases the older an individual is when the Life cover ceases.
Guaranteed Premiums – The premiums are guaranteed which means they will not change throughout the life of the policy, providing premiums are promptly paid and the policy does not lapse. The guaranteed premium option usually carries a higher initial monthly premium but makes budgeting easier as well as ensuring premiums do not go up in the long term due to age.
Reviewable Premiums - These are reviewed periodically and this is usually on the 5th anniversary of the policy’s commencement, then annually thereafter. Premiums will usually go up as the older the insured life (lives) become, however reviewable premiums tend to be less expensive than guaranteed premiums at inception of the policy.
Index Linking – Index Linking can be selected to protect the real value of the sum assured i.e. not decline against inflation. The sum assured can be linked to increase in line with an index, such as the Retail Price Index (RPI) or a fixed numerical value, if selected the premiums will similarly increase in line with the index.
Wavier of Premium - This allows the individual in the event that they are unable to pay their monthly premiums as a result of accident, sickness or unemployment their regular contributions will be maintained by the Life Office to ensure the level of cover is retained. Inclusion of the feature will incur an additional charge to the policy premium.
The lump sum benefit payment is not subject to Income Tax however should the funds fall into your estate dependent upon the overall value of the estate, the payment could become subject to Inheritance Tax.
To eradicate the possibility of Inheritance Tax and ensure that the payment is made before Probate is granted life assurance policies can be Written into Trust. This will facilitate the lump sum benefit payment to fall outside of your estate.
An individual should also note that it would prudent to establish a will encompassing the proceeds of any Life Assurance policy to ensure that in the event of your death the distribution of funds will be according to their wishes. This is due to any specific expressions within a will supersede a death nomination form.
Medical Circumstances and Underwriting Process
An applicant’s medical history will be considered when a Life Office is underwriting a new policy. If an applicant has a poor medical history with numerous ailments their policy will include ‘premium loading’.
Premium Loading is whereby the policyholder will be charged an additional premium because there is a higher probability of a claim.
Income protection insurance is a long-term policy that will pay a regular income to the policyholder in the event that they are unable to work through long-term illness of incapacity. The policy can be used to pay living expenses and act as a substitute to their employment income. This can be particularly important if the individual is the main ‘bread winner’ for their family. The monthly benefit is payable until the end of the term of the policy or for a maximum period of 2 or 5 years.
There are a number of features that will inherently have a direct impact on the premiums an individual can expect to pay.
Policyholder details – The personal details of the individual applying for the insurance policy will affect the underwriting process. The policyholder’s age, lifestyle, medical history and occupation will affect the premiums calculated by the Life Office.
Deferred Period – A deferred period is an initial waiting period that must elapse during a claim before the benefit is payable to the policyholder. Usually a deferred period of 4, 8 or 13 weeks is selected, depending on the individual’s emergency/contingency fund, however it can be longer. Inclusion of a deferred period will reduce the premium required to purchase the desired level of cover.
Maximum Benefit – It is only possible to secure a monthly benefit of 50%-75% of the individual’s earnings for the previous year. This is due to the moral hazard that could arise by paying an individual the equal level of income whether they work or not. By setting this level it incentivises claimants to return to work if possible.
Policy Term – The policyholder may select a specific date for when the cover expires. This may be, for example, the maturity date of their mortgage or perhaps their 65th birthday (usually retirement age). If a claim against the policy is made the monthly benefit will be paid until the maturity of the policy or for a specific number of years.
The premiums calculated will take into consideration the term of the policy and the increased likelihood of a payment of benefits increases as the policyholder grows older.
There are a number of definitions that Life Offices use to measure incapacity and these are usually measured by ability to complete daily tasks with their Occupation and a number of daily living activities.
Own occupation – Unable to perform their current occupation. This is the highest level of cover achievable.
Suited Occupation – Totally unable to undertake any occupation to which they are suited by reason of training, education or experience.
Any Occupation – Totally unable to perform any occupational task. This is the lowest form of protection.
Accident, Sickness and Unemployment (ASU)
ASU policies provide a similar protection for the individual. A monthly benefit is payable if the policyholder is unable to work due to long term sickness, accident or unemployment. The level of protection is limited to 50%-75% of their earnings and a deferral period can be selected.
Group Critical Illness Cover
Employers can arrange Group Critical Illness policies through a Life Office on behalf of employees.
Employees are banded together by age group and/or amount of cover required and a single rate premium is payable for each policy. Individual policies are not underwritten based upon medical history and lifestyle factors and therefore can be significantly cheaper than if Critical Illness Cover was purchased individually. Despite this reduction in underwriting pre-existing medical conditions are excluded upon a claim.
Cover can be a fixed amount or a multiple of salary and tends to be payable after a period of 14 – 30 days after diagnosis of a critical illness providing the policyholder survives. Underwriting of the Group Critical Illness plan is considered on an occupational basis.
If the employer pays the monthly premium on behalf of the employee this is taxable as a benefit-in-kind. If a claim is made the benefit itself is payable tax free.
Family Income Benefit
This type of assurance will pay a monthly benefit in the event of the policyholder’s death for the duration of the policy. Family Income Benefit is an alternative to Life Assurance as a monthly benefit will be paid rather than a lump sum. The benefit will be paid for the duration of the policy and therefore is usually recommendable to take the policy out till age 65 at which time an individual tends to retire, or when a current financial dependent becomes no longer dependent (for example a child reaching 18 or 21). The monthly benefit can be used to ensure that the policyholder’s family does not suffer financially in the event of their death.