Life Insurance / Critical Illness Cover

life-insurance-heroIs Life Cover known under different names? Because Life Assurance is such a varied and flexible product, it can come under a number of different names. Each generally describes the covers aims however some are simply interchangeable with Life Assurance:

Reasons for Cover

Why do you need it?
The loss of a spouse or parent can leave dependants with additional issues to cope with other than the emotional. If you are inadequately insured, your dependants may be left with a dramatically reduced household income, which could affect their quality of life. Potentially there may be reduced opportunities for children such as the ability to pay for a university education or difficulties in maintaining mortgage payments on a reduced income.
In the event of your death, a lending institution will not write off your debt. Rather, they will continue to pursue the debt through your dependants and could, ultimately, foreclose on the loan meaning the loss of the family home.

What will the State provide?
The main benefits the State may provide are the Widowed Parent’s Allowance and Child Benefit. Depending on whether the widow(er) qualifies for Income Support, the State may or may not help with paying the mortgage interest.
The method for calculating which benefits an individual may qualify for is extremely complicated. More information is available at the Department of Work and Pensions website www.dss.gov.uk.
Types of Life Assurance Cover

Life Insurance
A general term used to mean the same as Life Assurance. The difference is that in the insurance world they insure against something which might happen but they assure against some they know definitely will happen at some stage, i.e., death.

Mortgage Life Assurance / Mortgage Life Insurance
Mortgage Life Assurance is used to protect your mortgage against the risk of you dying and leaving it behind for your family to continue paying.
Mortgage Life Assurance is only suitable for mortgages which are Capital and Repayment because the level of cover is designed to reduce as your mortgage reduces over the years.

The reduction ensures that there is always enough in the ‘pot’ to pay off the mortgage if the worst happens but there will be very little surplus remaining.

Decreasing Life Assurance / Decreasing Life Insurance

Decreasing Life Assurance is a term used to mean the same as Mortgage Life Assurance. The ‘decreasing’ refers to the reduction in cover over the years.

Term Life Assurance / Term Life Insurance
Term Life Assurance is the opposite of Mortgage Life Assurance in that the amount of cover remains the same throughout the term of the policy and does not reduce. This type of Life Assurance is suitable for those people with Interest Only mortgages, those wishing to cover funeral expenses and people wanting to leave a sum of money behind to ensure their families standard of living.

Level Life Assurance / Level Life Insurance
Level Life Assurance or Level Term Life Assurance is another term which is used to refer to Term Life Assurance.

Increasing Life Assurance / Increasing Life Insurance
Increasing Life Assurance is an extra option offered by most insurance companies which allows you to protect your Term Life Assurance policy from the effects of inflation. Each year you will be offered the opportunity to increase your amount of cover inline with the retail price index without any further need for medical information.

This allows your policy to retain its real value over the years so your family receive a payout of equivalent value in years to come.

Index Linked Life Assurance / Index Linked Life Insurance
Another term used to refer to the increasing life assurance option offered on term life assurance policies.

Critical Illness Cover
Critical illness cover is an important financial safety net. It’s designed to to pay out a fixed cash amount if you’re diagnosed with one of the critical illnesses covered in the individual insurer’s policy.

Critical Illness Cover is designed to pay out in most circumstances including cancer, heart attack and stroke. However because of advances in medicine, not every type of cancer will have a severe impact on your lifestyle if discovered and treated early enough, for example, a cancer needs to have spread or reached a specified severity to be covered.

Life Insurance Q & A

Will Life Assurance cover me if I become ill?
Under normal circumstances you Life Cover will not pay out anything to you if you are ill. The policy is only designed to cover you for death and as a result will only pay in this circumstance.

Why do you need Critical Illness Cover?
Critical illnesses are more common than people tend to believe and can affect anyone at any time. A number of critical illnesses are being diagnosed at a younger age.

What is Terminal Illness Cover?
Policies can include something called ‘Terminal Illness Cover’ which will allow, at the insurance companies discretion, a payout of your policy early if you are diagnosed with a terminal illness where you will die within 12 months.

This is offered as a goodwill gesture by the insurance companies to allow you the opportunity to settle your affairs and make your own arrangements before you die.

It is important to understand that this is not the same as Critical Illness Cover and will only be offered for conditions where your doctor has told you that you will die within 12 months.

Can I get Life and Critical Illness Cover together?
Taking Life and Critical Illness Cover together can provide a great method of ensuring you are fully protected against the eventualities of death and contracting a critical illness such as a heart attack or stroke. It can also serve to reduce Critical Illness premiums compared to taking a Life Assurance and Critical Illness Cover separately.

Can I protect my policy against inflation?
Your policy can include an option called index linking which allows it to increase on an annual basis to offset the effects of the years inflation and increases in the retail price index.

This is important because as time goes by the real time value of your payout will decrease. That is to say that what you can buy for £100,000 today will not be the same in ten years time. Index linking your Life Assurance policy will allow it to maintain that value.

How can I make sure my policy pays out quickly to the person I choose?
At the time of your death your family will obviously be upset and whilst thinking about your insurance payout will probably not be the first thing they want to think about, it may be necessary to cover your funeral expenses or pay off your mortgage. As such it is important that the process for ensuring your family is paid quickly is in place.

Normally your life insurance payout would be paid into your estate and left to the process of probate to decide how it should be divided up and used. Unfortunately probate can be a lengthy process (at times up to 6 months) especially if your will is contested.

One way to avoid the probate procedure for your life assurance is by having your policy written into trust. Writing your policy into a trust allows you to nominate to whom the payout should be made, meaning that it is paid by the insurance company much faster to exactly who you intended it to go to.

As an added benefit, writing your Life Cover policy into trust can also help to limit the effects of inheritance tax on your estate because the payout would no longer form part of the estate.

Having your policy written into trust can normally be done at no extra charge as long as you include it on the application of the policy itself.

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