Term Life

This is the simplest and least expensive type of life insurance, and is known as term insurance, because you choose how long you're covered for, say, 10, 15, or 20 years (the term). It only pays out if you die within the term you've agreed.

There are different types of policy you can have:

• Level term or increasing policy (you may choose to have the cover and premiums remain level or to rise over the years to combat inflation for certain benefits)
• Decreasing policy (where cover decreases over the years)
• Family income benefit (a policy which pays out income rather than a lump sum)
• Renewable policy (which lets you extend the original term)

Level Term (or increasing policy if you elect to have the cover and premium increase) pays a lump sum in the event of death during the term of the policy. There is no investment element, so at the end of the term there is no maturity value and life cover lapses. The benefit is paid tax free and premiums are usually monthly. Because the term and benefit are known from the outset, and there is no investment content, term assurance is a very cost-effective method of protection.

Decreasing Term works similar to Level Term, but the benefit is set at outset and gradually decreases over the term of the policy. These policies can be used as cover for a repayment mortgage (capital and interest mortgage), or other loan where the amount of capital outstanding also decreases over time. Because the benefit reduces over time, the premiums are kept very low.

Family Income Benefit works the same as term assurance, but instead of paying a lump sum upon death, it will pay a regular monthly tax free income in the event of death to your dependants up until the end of the term of the policy.

Whole of Life

This is life cover without a predetermined set term, i.e. it will remain in place until death, unless cancelled by the owner of the policy. Whole of Life pays out an agreed sum of money in the event of death, as long as the premiums have been kept up to date. Whole of Life cover may often be used to provide for issues such as Inheritance Tax.

Critical Illness

Critical Illness is usually available as an addition to all term assurance plans, but can be bought on a stand-alone basis. Critical illness insurance is a long-term insurance policy designed to pay a lump sum or income on the diagnosis of certain life-threatening or debilitating (but not fatal) conditions such as a heart attack, stroke, certain types/stages of cancer, multiple sclerosis and loss of limbs. The illnesses covered will be specified in the policy along with any exclusions and limitations – these differ between insurers. Critical illness policies usually only pay out once, so are not a replacement for income. You can use the pay-out to pay for medical treatment, pay off your mortgage or anything else.

Before you take out cover, here are some things to consider:

• Critical illness insurance pays out if you are diagnosed as suffering from one of the specified illnesses.
• Policy summaries will often set out a list of illnesses covered, but this is only a guide and full details will be in the policy document. This will also set out the criteria that have to be met before the insurer will pay a claim, including defining the level of severity of the illness.
• As an example, in the case of cancer, not all cancers or stages of cancer are covered. And for heart attacks, the insurer will need to have medical evidence of the severity of the condition before paying a claim. So make sure you check which illnesses are covered.
• It does not cover simply any sickness that affects your ability to work – it is specific about which illnesses are covered.
• Some insurers exclude all pre-existing conditions, but others will decide on the basis of your personal medical history.

Total & Permanent Disability (TPD)

This benefit is designed to pay a single lump sum benefit in the event of the life assured becoming totally and permanently disabled due to an accident or illness. It is often incorporated into a Critical Illness benefit.

Income Protection

Income protection insurance (also called permanent health insurance) replaces part of your income (tax free) if you are unable to work for a long period of time, because of illness or disability, and will continue to pay out until you can return to some kind of paid work or reach retirement or the cover term expires, whichever is sooner. It has a waiting period before it will start to pay out. The longer you agree you'll wait, the lower your premiums will be, so it is important you find out what income you can get from your employer, and other insurance (such as mortgage payment protection insurance) in the event of illness or disability.

If you are an employee and you fall ill, your employer might pay you your full pay for a few weeks or months. By law, an employer must pay most employees statutory sick pay for up to 28 weeks, though this will probably be a lot less than your full earnings. After that, you would probably have to rely on State benefits. State benefits are not generous. You would probably see a substantial drop in your income if you were out of work for more than a few months, because of illness or disability.

However, some employers arrange group income protection insurance for their employees as a perk of their job, which can pay out an income after the statutory sick period. So check what you are entitled to.

Insurance aims to put you back to the position you were in before you suffered a loss. But it does not allow you to make a profit out of your misfortune. So the maximum amount of income you can replace through insurance is broadly the after-tax earnings you have lost less an adjustment for State benefits you can claim. This usually translates into a maximum of, say 50% to 65% of your before-tax earnings.

Mortgage Income Protection

This is a benefit that will pay a monthly income to cover regular mortgage payments (there may be certain restrictions) in the event of the life assured being unable to work due to an illness or injury, and there is a loss of income.

Accident, Sickness & Unemployment (ASU)

ASU policies were traditionally sold to accompany mortgages, allowing for a regular income to be paid to the insured should they be unable to work (or lose their job). The product can be split down, and unemployment cover is usually the optional extra available for an additional premium. It is important to compare ASU and Income Protection closely, as one may be more suitable than another. ASU is a short term benefit, which will usually pay for a maximum term of 1 to 2 years.

Private Medical Insurance (PMI)

Every UK resident is entitled to free healthcare from the NHS, but you may consider buying health insurance so that you can have a choice in the level of care you get. You don't have to take out health insurance, but think about how you'd be able to afford medical treatment if you didn't want to use the NHS.

Like all insurance the cover you get varies – but basic private medical insurance may pick up the costs of most in-patient treatments (tests and surgery) and day-care surgery, and some extend to out-patient treatments (such as specialists and consultants).

Cover can be purchased on a full medical underwriting basis, which means you will be asked a number of questions about your health and, based on the information you provide, the insurer will decide the conditions of your cover. You can also apply for cover on a moratorium basis, which means you will not be asked any questions about your health, but if you have suffered from any health conditions in the last five years, these will automatically be excluded from cover initially.

What is not covered:

• You can't take out cover now for treatment you know you're going to need.
• If you've had health problems in the past (pre-existing conditions), your insurer may also exclude those conditions from your cover. If you are asked to disclose these when applying for the insurance you must do so, or you could invalidate your policy, which means the insurance company won't pay out if you make a claim.
• It does not cover the treatment of chronic medical conditions. There are various definitions of chronic conditions depending on the policy, but broadly it is a long-term medical condition, which is likely to continue to need regular or periodic treatment.
• Some exclude certain types of treatments such as out-patient treatments, routine treatments (such as health checks), dental care or experimental treatments.
• Most also exclude routine pregnancy, HIV/AIDS, fertility treatment, mental or psychiatric conditions, and elective treatments you may choose to have, such as cosmetic surgery.

Cost of protection examples

For your interest, I have provided some illustrative quotations (bearing in mind that these are samples and would be subject to change due to underwriting and other factors). You will note how factors such as smoking status and age influence the premium. When you consider the premium payable for the enormous peace of mind and the positive impact protection can have on you / your family in an unplanned event such as death, permanent disability, critical illness, etc, there is every reason to prioritise your Personal Protection planning.

Example 1

Male age 41, non-smoker working in administration wishes to apply for level term life cover of £250,000 for a term of 25 years: Illustrative approximate monthly premium: £29

Example 2

Female age 30, non-smoker working in administration wishes to apply for level term life cover of £200,000 for a term of 35 years: Illustrative approximate monthly premium: £11

Example 3

Female age 30, smoker working in administration wishes to apply for level term life cover of £200,000 for a term of 35 years: Illustrative approximate monthly premium: £20