Life Insurance Policy
Types of Life Insurance Policy Explained
There are many types of life insurance policy available in the UK today. Below are brief definitions on the life insurance polices available to protect you and your family.
Term Life Insurance Policy
Term life insurance is the most basic form of life insurance as well as being the most affordable.
You will be covered for a fixed period of time and your beneficiary receives a one off lump sum if you die during the policy term.
A term life insurance policy pays out a specific amount if you die within a selected period of years. As with most other options it can be set up as joint life, single life or life of another. It can also include many other benefits such as critical illness cover, income protection and waiver of premium, within the same policy.
There is no investment element with this form of life insurance; as such if no claim has been made the policy has no value at the end of the term.
There are different types of term insurance policy are available:
Mortgage Life Insurance Policy
Mortgage life insurance which is typically known as decreasing life insurance is where the ‘sum assured’ (the amount of cover you have) decreases over the term of the policy.
It is designed to cover a Repayment Mortgage. As your mortgage liability goes down, so does the cover to match. Your monthly premium however DOES NOT decrease, it will remain the same throughout.
Increasing Life Insurance Policy
Increasing life insurance is also known as ‘Index-Linking’ and basically is inflation proofing. It is an option that is built-in at the start of a level-term or plan that allows you to increase your cover (and premium accordingly) every year, in line with inflation. It keeps the value of the money. Increases are normally measured against the RPI (retail price index).
Level Term Insurance Policy
Level term insurance is where you take out a fixed sum assured that never changes. For example, if you take out a 10 year plan with £100,000 of cover, In the event of a successful claim, it will pay out £100,000 whether your claim is made at the beginning or the end of the period of cover.
Family Income Benefit Policy
Family income benefit is where the benefits of a life insurance policy are paid as a monthly income (typically to your family) instead of as a one-off lump sum. If you were to cover yourself for £1000 per month for the next 10 years and you died on day one of the plan, your family would get £1000 per month for the next 10 years. If you died in year 5, they will get £1000 per month for the next 5 years only and so on. It is normally used to cover things where the requirement for the cover gets less over time or are for a fixed period, so for example, children growing up, school fees etc...
Critical Illness Cover Policy
Critical illness cover pays out a lump sum in the event of you being diagnosed with a Critical Illness covered by the policy, and surviving past the initial survival period (typically 14 days). The number & definitions of the illness’ covered will vary greatly between insurers, as will the additional benefits available such as Children’s Cover.
Income Protection Insurance Policy
Income protection insurance, sometimes known as permanent health insurance (PHI) provides a monthly payout if you are sick and unable to work for what ever reason. This can vary greatly from a broken arm to cancer, there is no set list of covered items like with critical illness insurance. It can pay up to 65% of your salary until you are fit and healthy, (some providers offer a short term option of 1 or two years per claim). The length of the policy is up to you typically your mortgage term or to cover you until your retirement. In order to make a claim, you must wait until you are no longer receiving sick pay from your employer, typically 0 days, 1 week, 4 weeks, 8 weeks, 13 weeks, 26 weeks and 52 weeks. The longer the deferred period the cheaper the policy is. This type of income protection insurance policy is available for self-employed people with or people who receive no sick pay. Multiple claims are possible throughout the term and the insurer will not increase the premium if you do make multiple claims. In short, Income protection cover allows you to buy your own sick pay.
Whole of Life Assurance Policy
Whole of life assurance is designed to provide life cover for the whole of your life. If you are lucky enough to live beyond 100 you no longer need pay any premiums. This type of policy is usually used to pay for funeral costs and having a large sum assured can be expensive. It is medically underwritten like normal termed cover. You can have critical illness cover on its own or a life and critical illness policy combined. There is no investment element with this form of life insurance; as such if no claim has been made the policy has no value at the end of the term.
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