I would like to get back to basics and discuss Life Assurance. Many people do not like talking about life cover, however as the old saying goes you can’t avoid “death or taxes” and life cover therefore plays an important role in our lives as we move through the various life stages.

Life insurance takes many forms, including Term assurance, family income benefit, whole of life cover and specialist cover such as Critical Illness cover. Each of these products is designed to meet certain needs at different times in your life. Let’s look at each type of cover and discuss how they fit a particular need.

Term assurance is normally the most cost effective type of life cover as it has no investment content, meaning premiums tend to be cheaper. This type of life cover can be used to protect a mortgage debt over a fixed term. For example if you have a £100000 mortgage over 25 years, you would look to cover this amount over the mortgage term. Once the mortgage has ended then the policy will do like wise. So if you or in the case of a joint life policy, your partner should die during the mortgage term, there would be sufficient funds to clear the mortgage off. Term assurance can be level i.e. the sum assured remains the same throughout the term or decreasing, this means the sum assured reduces each year. This type of decreasing term assurance is commonly used to protect Repayment mortgages.

Family Income Benefit

Family income benefit is not as well known, but is still a term assurance policy. It differs from normal Term assurance in that instead of paying out a lump sum on death, it pays out and income either monthly or annually. Family income benefit is really good for those with young families on a budget, as it tends to be even cheaper than normal term cover. So how does it work? Well instead of saying you need £200000 life cover, you could say I want £30000 per annum paid out if I die during the policy term. So if you had an 18 year Family Income Benefit Policy and died in year 2,the policy would pay out £30000 per annum for the next 16 years to your dependents. It is in my opinion a really cost affective way to protect your children if anything was to happen to you and the premiums tend to be a lot cheaper.

Whole of Life Cover

The clue is in the title here as whole of life cover is designed to cover you for, you guessed it, the whole of your life! Unlike term assurance, whole of life cover will pay out when ever you die. This is why it tends to be more expensive than term assurance. I don’t want to go into too much detail about the technical side of this cover just now, suffice to say it comes in two forms, with investment content and without investment content. It really is more suited the those who want to cover funeral costs or to leave their family or others a definite lump sum. However a word of warning if you are considering this cover always take independent advice financial advice. There are issues with trusts,inheritance tax and so on. Any decision on any type of life cover requires advice, whether it’s whole of life or term assurance.

Critical Illness Cover

I am not going to go into great detail about Critical Illness Cover because it really needs a whole newsletter to itself. I want to dispel some myths about it and clarify what kind of cover it offers. Critical Illness pays out a lump sum on confirmed diagnosis of a defined illness. It does not pay out income if you are of sick, nor does it pay out unemployment benefit. These are two completely different products, one being Permanent Health Insurance, the other being Payment protection. Critical illness definitions vary greatly from provider to provider and again it is vital that you take independent financial advice. The cheapest premium does not always mean the best cover, some Critical Illness policies might only cover 12 conditions but another might cover 24! For the same cost. Critical Illness is most commonly associated with Heart Attack or Cancer and in most cases if you survive 28 days, they will pay out a lump sum. Of course there are certain exclusions to types of heart attack and cancers depending on the provider, again advice is vital here. Critical Illness certainly has its place and is suitable for people without dependents as the lump sum is paid to them on survival of the critical illness. It is good cover to have if you have mortgage also, as it will clear the mortgage debt, if the sum assured is sufficient to do so. I have from experience had the pleasure of informing one client after a massive heart attack which he survived that his mortgage has been paid of in full to the tune of £247000.He is still going strong but has no mortgage to worry about any longer and is lot less stressed out. Out of all the covers Critical Illness is the most expensive, but can be tailored to meet most budgets, even if you have some cover it is beater than none at all

I hope I have clarified some points and cleared up other mis-conceptions regarding the different types of life cover available today in the UK.