Life insurance

How does it work

What is life insurance?

Life insurance is in simple terms a policy that will pay out an amount if you die. Policies can be held by an individual or in joint names, with a spouse or partner. Depending on the type of product the pay out may be a lump sum , which can be used to pay off a mortgage for example, or it may be a regular income paid out to a named beneficiary, such as a spouse, which can be used to replace a monthly wage.

Examples of types of products that pay out a lump sum are Term Assurance and Whole Life. The main difference is that Term Assurance policies are set up for a fixed length of time (e.g. 10, 15, 20 years) with Whole Life policies offering cover until the insured person dies.

Whole Life policies will always pay out eventually provided you keep paying premiums. Term Assurance policies do not generally pay out anything if you survive past the fixed term of the policy.

The two main types of Term Assurance are Decreasing Term Assurance and Level Term Assurance. The pay out on a Decreasing Term Assurance policy reduces over time and is quite often used to cover the outstanding balance on a capital repayment mortgage. The pay out on a Level Term Assurance policy remains the same for the policy's duration and is quite often used to cover the outstanding balance on an interest-only mortgage.

Income Benefit policies are an example of products that pay out a regular income. They can be used to cover regular household and family bills if one or more wage earners were to die.

What is health insurance?

Health insurance policies pay out if the person(s) insured under the policy suffers some specified damage to their health. Depending on the product the pay out may be a lump sum (which can be used to pay for adaptations to your home for example) or it may be a regular income (which can be used to replace your monthly wage if you're off work for an extended period of time).

An example of a product that pays out a lump sum is a Critical Illness policy. It pays out if you are diagnosed with one of the specified illnesses covered under the policy and go on to survive for a specified amount of time. The number and severity level of illnesses covered differs from one insurer to another.

Critical Illness policies are sometimes sold as part of a single policy with either Decreasing Term Assurance or Level Term Assurance policies. Such policies are sometimes called Accelerated Critical Illness cover.

An example of a product that pays out a regular income is an Income Protection policy. It pays out if you are unable to work, generally if due to an illness or injury. Policies generally have a deferment period in which no income is paid: when payments do start they continue until some pre-determined event such as the end of the policy, an upper age-limit being reached or you return to work.

The key points

Below are some useful points to consider when thinking about your Life & Health insurance needs:

• You will probably have a need for different products based on what stage you're at in your life.

• To help determine which products are right for your circumstances you can seek financial advice from a qualified professional.

• You can usually buy policies in your name or as a joint policy along with a partner or spouse.

• You should always check what your policy covers e.g. in the case of a Critical Illness policy what illnesses are covered and what severity level do you have to have in order to trigger a payout? Your financial adviser should be able to answer any questions you may have.

• Protecting your life, income & health is the cornerstone of sound financial planning. You should regularly review what cover you hold, especially if you move house, have a child or experience any other significant life event.

• If you work or you have a family you should definitely consider protecting your life, income and health.

• Always check the status of your financial adviser: some can only offer advice on products from one or a limited amount of suppliers.

Glossary

Protecting your life and health may involve some unfamiliar words and phrases. Here's a quick guide to some of the most common ones to help you.

Critical Illness Cover

Health insurance that pays out a lump sum if you are diagnosed with one of the specified illnesses covered under the policy and then survive for a specified amount of time, within the duration (term) of the policy. The number and severity level of illnesses covered differs from one insurer to another. Can be sold on its own or as part of a single policy with either Decreasing or Level Term Assurance (know then as Accelerated Critical Illness Cover).

Decreasing Term Assurance

Life insurance that pays out an amount that reduces over the duration (term) of the policy. Usually intended to coincide with the reducing balance of a capital repayment mortgage. Also known as Decreasing Temporary Assurance or Mortgage Assurance. Can be sold on its own or as part of a single policy with Critical Illness Cover.

Free Cover

Insurers sometimes offer cover, free of charge, between the signing of a Life/Health policy application and the first payment being taken. Free Cover is usually subject to terms and conditions.

Guaranteed Premiums

Some Life and Health insurance policies have guaranteed premiums. This means the amount your pay each month will remain the same for the duration (term) of the policy.

Health Assurance/Health Insurance

Interchangeable terms describing a policy that pays out when a particular event happens to the life assured. Examples are Critical Illness Cover and Income Protection.

Income Benefit

Life insurance that pays out a regular income for the duration (term) of the policy if the life assured dies within the policy term. Income is paid out to whoever is specified on the policy e.g. spouse or children of the life assured.

Income Protection

Health insurance that pays out a regular income if you are unable to work, generally if due to an illness or injury. Policies generally have a deferment period in which no income is paid. Payments continue until some pre-determined event such as the end of the policy, an upper age-limit is reached or you return to work.

Level Term Assurance

Life insurance that pays out a fixed amount within the duration (term) of the policy. Sometimes intended to pay off the outstanding balance on an interest only mortgage. Can be sold on its own or as part of a single policy with Critical Illness Cover.

Life Assurance/Life Insurance

Interchangeable terms describing a policy that pays out on the death of the life assured. Some examples are Decreasing/Level Term Assurance, Income Benefit and Whole Life Assurance.

Life Assured

The person covered by a Life or Health policy. This can usually be the person who sets up the policy (own life), someone different (life of another) or the person who sets up the policy along with someone else (joint life) such as a spouse or partner.

Reviewable Premiums

Some Life and Health insurance policies have reviewable premiums. After a set period your insurer will review the monthly payment you make and may alter the amount based on various factors such as their claims experience.

Tele-underwriting

A process used quite widely across the industry whereby details needed for underwriting a customer are collected over the phone, sometimes by a trained medical professional. It has generally replaced the need for a customer to fill out a medical questionnaire.

Term Assurance

Life insurance that pays out a set amount if the life assured dies within the term (i.e. the duration) of the policy. The duration is set when the policy is created. If the life assured survives for the term of the policy then no payment will be made (contrast with Whole Life Assurance).

Underwriting

The process whereby an insurer assesses how likely a customer is to make a claim against a policy and sets a price accordingly. For Life & Health insurance a customer will usually be asked questions about their medical history and lifestyle, along with questions about their family's medical history.

Whole Life Assurance

Life insurance that pays out a lump sum no matter when the life assured dies i.e. providing cover for the whole of your life. Will always pay out eventually (contrast with Term Assurance) providing you keep paying premiums.

Useful Links

Here are some useful links we find helpful and thought you might feel the same.

FSA website explaining some more about Life & Health insurance
http://www.moneymadeclear.fsa.gov.uk

Financial Services Authority (FSA)
http://www.fsa.gov.uk              

Association of British Insurers (ABI)
http://www.abi.org.uk 

Tools

Use our Life Insurance Calculator

Use our Budget Calculator