UK residents may choose from several different types of life insurance policies.
We provide explanations of each type of life policy available for protection of your loved ones and you.
Term Life Insurance
The most basic and most affordable type of life insurance is called term life insurance.
This covers you for a fixed time and pays a one off lump sum to your beneficiary if you die during the term of the policy.
A term policy can be established as single life, joint life, or life of another. This policy may also feature waiver of premium, income protection, and critical illness cover.
Term life insurance does not have an investment component. Therefore, if a claim is not made, the policy ceases to have value once the term ends.
There are several different types of term insurance policies available.
Mortgage Life Insurance
Typically called decreasing life insurance, mortgage life insurance features a declining amount of cover (called the “sum assured”) over the policy term.
The cover amount is designed to cover the balance of a Repayment Mortgage. As the liability for the mortgage decreases, the cover amount declines to match it. However, the monthly premium remains the same for the duration of the policy term.
Increasing Life Insurance
Increasing life insurance cover is also called “Index-Linking” and is designed as inflation protection. This option is built-in at the beginning of a plan or level-term and increases the cover and premium annually in line with inflation to retain the value of the benefit. The increase is typically measured against the Retail Price Index (RPI).
Level Term Insurance
Level term insurance features a fixed benefit for the duration of the policy term. For example, a 10-year plan featuring £100,000 in cover will pay £100,000 if a successful claim is made any time during the cover period.
Family Income Benefit
Family income benefit insurance pays a life insurance policy benefit as monthly income rather than a one-off lump sum. For example, if you take out £1000 monthly cover for 10 years and die on the plan effective date, your beneficiary will receive £1000 each month for the next 10 years.
If you die during the year 5 of the plan, your beneficiary will receive £1000 per month for the next 5 years and so forth. Family income benefit is typically used to cover childcare expenses, school costs, or another expense that declines over time or lasts for only a fixed period.
Critical Illness Cover
Critical illness pays a lump sum if the policy holder is diagnosed with a covered critical illness as determined by the policy and survive past the required initial survival period, which is typically 14 days. Different insurers cover different critical illnesses and provide different definitions of these illnesses. They also offer different additional benefits including cover for children.
Income Protection Insurance
Income protection insurance is also called permanent health insurance (PHI). It provides a monthly payout if you become sick and cannot work. Unlike critical illness cover, there is no defined list of conditions covered, resulting in everything from a broken leg to cancer initiating a claim. Income protection insurance pays up to 65 percent of salary until you are considered healthy. Some providers limit the benefits period for each claim to one or two years.
You select the policy term, typically to correspond with retirement age or the end of a mortgage. A claim cannot be made until your employer is no longer providing sick pay. Typical deferment periods are zero days, 1 week, 4 weeks, 8 weeks, 13 weeks, 26 weeks, and 52 weeks.
Policy premium decreases as deferment period lengthens. Income protection insurance is available to people who do not receive sick pay or who are self-employed. You can make multiple claims during the term period and this will not increase the premium. This cover equates to purchasing your sick pay.
Whole of Life Assurance
Whole of life assurance provides life cover for your lifetime. If you live beyond age 100, you will not need to continue paying premiums. This policy is typically used to cover funeral costs and it can be expensive to assure a large sum. Like term cover, whole of life assurance is medically underwritten.
You may elect separate critical illness cover or combine critical illness with this life policy. This type of life insurance does not have an investment aspect so if a claim is not made, the policy does not have value.