Life Assurance Types – Which is For Me?

As discussed in our other pages on life assurance you will see that it comes in various shapes and sizes, on this page we have broken down the basic terms and types of life assurance so you can make an informed decision as to what type of product is suited to you. This page should not be used in place of getting advice from a professional broker but it will give you enough of an idea to know what is and is not suited to your needs.

Life assurance can be broken down into 2 main types:

If it isn’t immediately obvious, death pays out if the policy holder dies, illness will pay out if the policy holder becomes ill. You insurer will provide you with full details of illness’ which qualify for a payout, so there’s no need to call them each time you catch a cold!
For both Death and Illness cover you can have one of two different payout types:

Income means the insurance policy will payout a steady ‘income’ to the beneficiaries.

Cover in the event of death:

Lump sums

Life Assurance:

Life Assurance, often referred to as Life Insurance or Term Assurance comes in many different flavours - all will pay a lump sum to the nominated beneficiaries in the event of the death of the policy holder.


Mortgage Protection:

Mortgage Protection is life assurance that has been taken out with the specific intent of covering any mortgage debt that might be outstanding in the event of the policy holders death. Below we have outlined the life assurance types applicable to Interest only and Repayment mortgages as they will have different requirements.
Interest Only Mortgages(Level Term Assurance): With an interest only mortgage you are only making interest payments, as such your capital amount does not reduce over time. It is therefore important to ensure your life assurance policy will pay out the same amount on day one as it will on day 28 of the 23rd year for example. The most suited life assurance policy to protect an interest only mortgage is Level Term Assurance (LTA) as the payout remains constant over the length of the policy.

Repayment Mortgage (Decreasing Term Assurance):  With a repayment mortgage, where you are repaying both capital and interest, the total loan amount will decrease over the term of the mortgage. It therefore makes sense to ensure you life assurance policy does the same. The most suited life assurance policy to protect a repayment mortgage is Decreasing Term Assurance (DTA) also. As the name suggests decreasing term assurance provides a settlement that decreases over time. So suited is this type of assurance that it is commonly known as a Mortgage Protection Assurance policy.

Decreasing term assurance will cost less than level term assurance over the same period as the insurance companies risk is ever reducing (as each day passes the payout reduces).

Income:

Family Income Benefit (FIB)

Family Income Benefit is a type of Life Assurance policy which will pay out a regular income to the beneficiaries. This option can suit those who do not wish to deal with the worries of a large lump sum such as finding suitable investment vehicles in which to hold the money.

Cover in the event of illness:

Lump sum

Critical Illness Cover

Critical Illness Cover (CIC) or critical illness insurance as it is also known will pay out a lump some to the policy holder (who is also the beneficiary) on diagnoses of a critical illness. Critical illness cover does not necessarily cover all illness, in most cases there will be a list of some 30 or more illness which if the policy holder is diagnosed with , they will pay out.
Common examples of critical illness are cancers, heart attacks and strokes. Critical illness usually covers disabilities of sorts such as deafness and loss of limbs or sight.
Critical illness cover is often taken out in conjunction with a Life Assurance Policy so that a lump sum is paid out in the event of death.

Income:

Income Protection or Income Replacement (Permanent Health Insurance – PHI)

Income protection policies are designed to do exactly that, protect your income. If the policy holder falls ill their income protection policy will provide a regular monthly income until they are able to return to work or until they reach retirement. Income protection policies usually only cover up to 50% of the policy holders income.

Income Protection, also referred to Income Replacement or Permanent Health Insurance (PHI), provides the policyholder with a regular monthly income (of up to 50% of your earnings) should illness or accident prevent them from working. They will continue to receive the income until they return to work or retire.