There are many forms of life cover – here we look at the most common ones and what they can be used for:
Level Term Assurance. This pays out a lump sum of money (chosen at application stage) for a specified period. The amount of life cover payable doesn’t change throughout the term. This type of plan is normally used to protect an Interest only mortgage or could be used for dependant protection. There is no investment value with this type of cover.
Decreasing Term Assurance. The is commonly used to protect a capital and interest mortgage (sometimes known as mortgage protection). The amount is designed to repay the mortgage outstanding and to do this we need to make some assumptions. We assume a notional mortgage rate of 8% which means as long as the mortgage rate you’re paying doesn’t go above 8% for the whole of the mortgage, there should be enough life over to repay the debt on death within the term.
Another type of decreasing term assurance is known as Family Income Benefit. This is aimed at dependent protection and is normally used to pay an annual amount of money after death within a specified term.
There is no investment element within a decreasing term assurance policy.
Increasing Term Assurance. This is the same as Level Term Assurance, however the value and premiums increase each year to ensure the value of the cover isn’t eroded by inflation. It can be increased by a fixed percentage of 2%, 3% or 5% or by the Retail Prices Index (RPI).
Whole of life Cover. This does exactly what it says and will pay out on death, regardless when it happens. There are a few different types of whole of life policies, some have a notional investment element, others are just purely premium driven. This type of cover tends to be the most expensive as it will definitely have to pay out at some point.
An example of when a whole of Life policy would be required is when there’s a need for protection for the whole of someone’s life, for example if you have a dependant who has a disability and will always need support. This type of cover will always pay-out.
Also, a whole of life policy can be used to help plan for any potential inheritance tax liability. It is advisable to consider placing these types of policies into trust to ensure you are not increasing any potential Inheritance tax liability.
Critical Illness Cover. This type of protection will pay out a lump sum if you were to suffer and survive a major illness such as cancer, stroke, heart attack etc. Each provider has various different conditions they can cover you for, however most offer between 35 – 40 core conditions. Critical Illness cover is basically like having life cover – it will pay out a lump sum of money but without you dying.
You can have a standalone policy, or more commonly, it tends to be linked with life cover. Again, you can have different variations of the cover, so you can have decreasing, level and increasing cover.
Income Protection, or otherwise know as Permanent Health Insurance. This type of protection pays a regular income to you if you’re unable to work through long term sickness, illness or disability. If you’re employed, your employer may pay you for a period of time. Once they stop paying you, the Income Protection policy starts – this is known as a deferment period. Income Protection is very different to critical illness cover as one pays a regular income if you’re off sick and the other pays a lump sum of money if you suffer and survive a major illness.