Life and Critical Illness Cover

Life insurance is a topic most people don’t like to think about, but it is important to consider how your family/dependants will financially cope if the unfortunate should occur.

Ultimately the aim for obtaining life insurance is to get financial security and peace of mind that your family and loved ones will be looked after once you pass away. But there are many options and it is important to understand these options so that you select the right cover for you.

Term and whole of insurance

Term insurance is typically the cheapest type of insurance as it pays out if you pass away during the duration of the policy.

In contrast, whole of life insurance is usually the most expensive as the pay-out is certain and hence there is no policy end date.

Premiums

The premiums of a life insurance policy are usually fixed throughout the period of the policy and most people have the term policy linked to some specific expense such as a mortgage or children’s school fees. As life insurance is not like a savings scheme, if you survive past the term of the policy then there will be no claw back on the premiums or any type of remuneration in general.

Different types of term cover

Generally there are 3 main types of term insurance:

Level Term Insurance – The sum assured is the same throughout the policy.

Decreasing Term Insurance – The sum assured reduces over the period of the cover – typically taken out by people with a repayment mortgage. As can be expected, this cover is cheaper than level term insurance.

As a side note, your mortgage provider will most likely try and sell you life cover too, but its best to compare quotes to get the savviest deal around.

Increasing Term Insurance – The sum assured increases over the period of the cover to account for increases in inflation/cost of living. The increment is either fixed, typically 5%, or it tracks inflation according to the Retail Price Index (RPI). This type of cover is the most expensive compared to Level and Decreasing Term insurance.

Family income benefit

Life insurance is typically paid out as a lump sum but you do have the option of having regular income by having the ‘family income benefit’. By having a regular income, you don’t need to worry about planning ahead in terms of protecting the investment as you can arrange for the income to be the same as your monthly salary and inflation – so it keeps in line with the growing cost of goods and services.

To add the premiums on this policy are typically cheaper but that is due to one main reason. That is that the pay-out is likely to be small as the regular income is only available up until the end of the policy. For example, if you took a policy out for 25 years but passed away on the 23^rd year, then the policy will only provide for your family for the remaining 2 years.

Joint life cover

Generally, joint life cover is cheaper then single life cover however the difference is not always significant and there are other disadvantages such that, the policy only pays out on the first death meaning the second person would need to get life cover again – at which point they are likely to be much older and hence it will be more expensive.

Ergo, for greater flexibility it is worth considering two single life policies – perhaps you can customise both the policies in line with your salaries or even have varying periods of cover.

Critical illness cover

In some cases, critical illness cover is only available with life insurance cover leading to critical illness cover being cheaper when bought combined than if purchased singularly. But with critical illness cover there is only one payout, so if the claimant is diagnosed with a critical condition than no further payout will be made once he/she passes away.

With regards to the type of illness covered, the list can be very long especially as some insurer’s cover more than 60 different injuries. However, it is important to note, that in many cases the illness needs to be critical or permanent before the pay-out will be triggered.

What’s more, it is important to note that there is a difference between critical and terminal illness such that most life insurance companies already include terminal illness cover as a standard benefit, meaning it pays-out if the doctor has confirmed the diagnoses and you are likely to pass away in the next 12 months. Critical illness cover pays-out from serious illness from which you might recover and hence a claim is much more likely.

Finally, you also have the ‘waiver of premium’, which is an add-on option to a standard life insurance policy. With a waiver of premium option, you can be exempt from paying future payments if you cannot work due to sickness or injury.

Kevin Patterson