Types of Insurance

Life Insurance

Covers against: Death
Type of benefit paid: Lump sum

Life insurance, also known as term insurance or life assurance will provide a sum of money in the event of death during the term of the policy. This cash lump sum is paid tax free and can be used by your dependents however they choose.

There are two main ways in which this cover is arranged:

A Level Term Assurance policy is where the amount of cover (also known as the “sum assured”) stays the same throughout the length of the policy. Both the sum assured and the term are set at the start of the policy. Level term assurance is often taken out to help pay off a mortgage and is most suited to interest only mortgages, where the amount owed does not decrease over time.

A Decreasing Term Assurance policy also pays out a cash lump sum in the event of death, however the amount paid out decreases over time. These policies are usually taken alongside a repayment mortgage so that the amount paid out is the same as the amount left on the mortgage. As the amount of cover decreases over time, the premiums for decreasing cover are typically cheaper than they are for level term cover.

Critical Illness Insurance

Covers against: Serious illness or injury
Type of benefit paid: Lump sum or regular income

Critical illness insurance will provide a tax free cash sum in the event that you are diagnosed with one of a set list of critical illnesses (most policies cover 40+ illnesses with one insurer protecting you in full or proportionately for 172) where your diagnosis meet the provider’s definition. This cash sum can be used however you need to use it, it could be used to clear a mortgage or it could be used to replace a lost income, to pay for private treatment or for whatever else you feel is required. Essentially it is there to financially support you when times are difficult. It would allow you to concentrate on what is really important, getting well and spending time with the family, rather than worrying about how the bills will be paid.

Like life cover, critical illness cover can be a fixed (or “Level”) lump sum or can fall in line with your mortgage balance (“Decreasing”) and you can either take it alongside life cover or as a standalone option. You don’t even need to fully cover the mortgage balance if your budget is tight, after all some cover in the event of serious illness is better than none. There are differences between providers regarding their definitions and the additional benefits that are available so it is not just a question of looking for the cheapest policy, but making sure you have the best level of cover you can get for your budget. If your family has a history of suffering from a particular illness, this is the insurance you should carefully consider while you are fit.

Income Protection

Covers against: Illness or injury
Type of benefit paid: Regular monthly income

An Income Protection policy pays out a monthly income to replace a proportion of your salary in the event that you are unable to work as a result of an accident or sickness. It will pay out after a set amount of time has passed. This is called the Deferred Period and it is set by you at outset. It can be a short as 1 day and as long as 12 months. The shorter the deferred period, the more expensive the premium paid. Income protection will continue to pay until you are either well enough to return to work, you reach retirement age or the end of the policy term is reached. This means that you have the peace of mind of a regular on-going income to maintain your lifestyle should you fall ill, or have an accident and need to take time off work. Importantly, this income cannot be affected by state benefit cuts. It is possible to add Unemployment Insurance to this type of policy which will pay a set amount per month for up to 24 months while you remain unemployed.

Family Income Benefit

Covers against: Death
Type of benefit paid: Regular income

Family Income Benefit is designed to pay out an amount of cover in the event of death, but instead of providing a one-off cash lump sum like standard life insurance, it pays a regular, tax-free income until the end of the policy term. This can be a suitable option for people who would rather know that their dependents had a regular monthly salary as if you were still there providing for them instead of having to decide what to do with a one-off lump sum.

The term of the policy can be chosen to fit your family’s circumstances; for example to take your youngest child to age 18 or 21 and the amount of cover you chose can be linked to inflation to ensure that, in the event of a claim, the benefit keeps its real value and spending power. Family Income Benefit is a relatively affordable way of ensuring that your family can maintain the lifestyle you want them to have, whether you are around or not.