Level Term Assurance is the technical name for life cover that stays at the same value throughout the chosen term of the policy. For example, a £200,000 life cover policy for 20 years would pay out £200,000 whether you died in year 1 or year 19 of the policy. This type of policy is often used to provide your family with a large lump sum upon your death, or to pay off an interest-only mortgage where the loan amount owed to a mortgage lender remains the same throughout the mortgage term.
Decreasing Term Assurance is the technical name for life cover that decreases in the amount insured throughout the chosen term of the policy. For example, a £200,000 life cover for 20 years would pay out £200,000 if you died on day 1 of the policy but would pay out £0 if you died on the last day of the policy. This type of policy is often used to cover a repayment mortgage because the amount you owe on a repayment mortgage decreases each year that you have the mortgage loan. Decreasing Term Assurance is cheaper than Level Term Life Cover because the amount that the insurer is likely to pay out decreases each year that you are alive.
Mortgage protection is usually another term for a Decreasing Term Assurance policy. However, a policy covering your mortgage doesn’t necessarily have to be one where the pay-out decreases. You have the option of protecting your mortgage loan with a level term policy. This means that the amount you are covered remains the same throughout the policy. People who have an interest-only mortgage, where they owe the same amount of capital throughout the term of the mortgage, tend to take out this type of policy.
Critical Illness cover pays a lump sum upon diagnosis of a critical illness such as cancer, a heart attack, or a stroke. Some clients may opt to cover their mortgage or debts with this, or some may opt to cover just their household bills for a reasonable period of time. Critical Illness Cover is more expensive than Life Cover as you are more likely to suffer a critical illness than to die during the term of your policy.
The definition of a critical illness is set by the Association of British Insurers (ABI). All the insurers that Haven work with comply with or exceed the ABI definitions. This is known as an ABI+ definition.
Terminal Illness cover is standard on life cover policies and means that if you are diagnosed as terminally ill, then your insurer will pay your life cover sum immediately. The definition that is used for Terminal Illness is having 12 months, or less, to live.
Some insurers will provide Terminal Illness cover for the full term of the policy. However, others will exclude this benefit towards the end of a Life Cover policy.
Income Protection provides a monthly amount paid to you should you be unable to work due to an accident, illness, or injury. The cause of being off work doesn’t have to be from a major, or critical, illness.
Income Protection is paid as a monthly amount and is directly proportionate to your income. Therefore, you cannot have more cover than your actual income. Income Protection can be paid for a short set period such as 2 years. This is known as a budget plan. However, most people prefer to cover themselves until the state retirement age, or for their mortgage term. For long-term illness, income protection is often better value for money than critical illness cover.
Family Income Benefit is a life cover policy that pays a monthly amount upon death rather than a lump sum. This can be useful if you wish to leave your family a monthly amount towards living costs or, to replace the income that is lost upon your death. It is usually cheaper than level term assurance and can be easier to budget for those left behind.
Relevant Life Cover is an HRMC initiative introduced in 2009. It allows employees and directors of Limited companies to pay their life cover through their business. This is similar to death-in-service schemes offered by some large employers.
Some other benefits offered by larger employers are also taxed because they are seen as perks or a Benefit In Kind. But with Relevant Life Cover, there is no benefit in-kind tax (P11d benefit). Not only is Relevant Life Cover an allowable expense for Corporation Tax, but it is also exempt from National Insurance and Income Tax. The policy must be placed in trust in order to be valid. This will also ensure that it pays to your chosen beneficiary or beneficiaries and is also not subject to inheritance tax.
Key Person Cover (previously known as Key Man Cover) is typically a Life Cover or Life & Critical Illness policy taken by a business to cover a key employee within the business. This may be because the key employee possesses a unique skill-set, or because they are responsible for a portion of the company income. The policy would pay out into the business and can be used to continue to pay the salary of the key employee if they were to suffer a critical illness or, it can be used to pay a replacement staff member. It could also be used to do both, or to cover the lost revenue for the period that employee is not in the business. Key person cover is also often taken to cover a loan or a company purchase.
Shareholders Protection is a Life Cover policy and, sometimes, a serious illness cover. When a shareholder dies, their shares become part of their estate and this can cause problems for the remaining shareholders. Shareholder Protection pays out a lump sum to the remaining shareholders so that they can purchase the shares from the estate of the deceased shareholder. This protects both the surviving shareholder(s), and the family of the deceased shareholders.
Often, a Shareholders Protection policy is entered into in conjunction with a shareholders’ agreement which determines whether all of the shares, or a portion of the shares are purchased, and how the shares are valued at the time of death.
Death-in-Service is the technical name for a life cover policy provided by an employer. The terms of these can vary but they usually offer a multiple of the annual salary of an employee. Some schemes will pay the benefit to your family if you die whilst at work, and some will pay the benefit regardless of the circumstances of your death. In some instances, you can nominate the beneficiary or beneficiaries of your cover and, in other instances, the policy will simply pay into your estate.
Private Health Insurance or Private Medical Insurance is a policy designed to pay for diagnosis and treatment of medical conditions through private hospitals and clinics.
Private Health Insurance can be taken out personally or via a company policy. Company policies (known as Group Private Medical Insurance) tend to be cheaper than personal cover, and insurers typically require a minimum of 2 employees or employers to be insured in the scheme. policy can be taken out. Company policies (known as group private medical insurance) tends to be cheaper than personal cover however typically requires a minimum of 2 staff members.
There are various levels of private medical insurance to cater for different budgets. And, additional benefits can be added such as dental and optical cover, mental health cover, worldwide cover, and cover for therapies such as physiotherapy and chiropractic treatment.
It is worth regularly reviewing private health insurance policies because they can be switched to a different insurer to reduce the costs. This can be done even in cases where there are ongoing claims in progress.
Waiver of Premium is a benefit added to a policy which means that if you are unable to work due to illness, accident, or injury, then you will not have to pay the premium for your policy until you return to work. This can help ensure that the cover remains in place when you may need it most but at a time when you would find it difficult to pay your premiums. The cost of this benefit can vary from a few pence to a few pounds per month.
Waiver of Premium can sometimes be declined due to the age of a client at the time of taking out a policy, or because of certain medical or lifestyle disclosures.
Indexation or Index-linking is the technical term for linking a policy to inflation. The purpose is to protect the value of the policy from the effects of inflation because inflation will otherwise decrease the buying power of money. For example, you can buy less with £200,000 today than you could have bought with the same amount 20 years ago. And, it is likely that in another 20 years you would be able to buy even less with £200,000 than you can today.
An Index-linked policy will give you the option to increase the amount of cover and the cost of the premium in line with inflation or at a pre-determined percentage. This option is given on the anniversary of the policy. You may also choose not to make any changes but, it is worth noting that sometimes you can only decline this benefit a certain number of times before it is no longer offered.
Enhanced Cover is a term often associated with critical illness policies. As more insurers compete to provide the best standard of cover, it is increasingly common for insurers to offer enhanced policies. This will often mean that critical illness policies will pay out earlier for some conditions than the standard definition for that illness would dictate. It can also mean that more conditions and less serious conditions may receive a pay-out or partial pay-out. It is also common now to enhance the level of children’s cover under critical illness policies to provide parents with a lump sum should their children become critically ill.
Should I have?
For a couple, deciding on whether to have a joint policy or two separate policies will depend on what they want to cover. For example, a couple with a joint mortgage but no dependants may find that a joint policy covering their mortgage would be best for their circumstances. A joint policy covers both of them and would pay out just once upon the death of the first person to pay off the mortgage loan.
However, a couple with a mortgage and with children may want to each have their own policies. That way, the life cover could be used to pay off the mortgage on the death of the first person and, upon the death of the second partner, the life cover could be left as a lump sum for their children.
Having separate policies doesn’t necessarily double the price. A real-world example would be:
A couple, both aged 30, healthy, and non smokers would pay £13.29 pcm for a joint £250,000 level term life cover policy for a 15-year term. If one of them were to die within that 15-year term, the policy would pay out £250,000 and would then end. So, even if the second person died within the 15-year term, there would no longer be a policy to pay out.
If the same couple took out two separate policies, with cover of £250,000 each, it would cost them £14.90 in total per month. If both died within that 15-year term, the pay-out would be £500,000 in total.
Decreasing cover is typically used to cover a repayment mortgage. This is because the amount of cover will decrease as you repay your mortgage. It is designed to allow for interest rate rises which means that you may receive a little more than is actually owed on the mortgage.
With level cover, the amount of cover will remain the same throughout the term of the policy. This type of cover is often used for interest-only mortgages, family cover, business cover, and shareholders protection.
Critical Illness Cover will pay a single lump sum payment in the event that you suffer from a specific critical illness that your insurer has listed as being insurable. The definition of a critical illness is set by the Association of British Insurers (ABI). Some insurers will pay out sooner than the government set definition for some conditions (known as an ABI+ condition).
You can also receive smaller, or part-payments, for less serious conditions such as less advanced stages of cancer or rheumatoid arthritis. It is also common for insurers to cover your children for a part-payment on some policies.
Having a lump sum critical illness payment can be effective to help with things such as adaptations to the home, taking time off work, private or experimental treatment.
Income protection isn’t a single lump sum pay-out. Instead, it provides a monthly payment to replace a portion of your monthly income and it pays you if you are unable to work through accident, illness or injury. The scope is wider because the reason for your inability to work could be from a critical illness or any number of lesser causes.
Typically, the policy will pay out after a waiting period (known as a deferred period). It is up to you to choose the deferred period that suits you. Deferred periods tend to be between 1-6 months depending on personal circumstances. For example, someone who is self-employed may feel that, in the event of an illness, accident, or injury, they would only want to exist on their savings for one month and would then like to have their income protection policy pay out to them. Others, who are employed and would receive sick pay from their employers, choose to have their income protection policy to defer until they stop receiving sick pay from their employer.
The length of time for which an income protection policy will pay is also chosen by you. Many people choose to get covered until retirement age or for the number of years that are remaining on their mortgage. This means that if they never recover from their illness, accident, or injury, they can be assured that they will be paid a monthly amount until the chosen term is reached.
Unlike critical illness cover which pays once, income protection does not end once you make a claim. So, if you claim and then return to work, your policy is still in force. In the event that you suffer an illness, accident, or injury again, you can claim again. If you are unable to work long term, it is usually the case that an income protection policy will pay out significantly more than a critical illness policy would do, and so is often much better value for money.
A real-world example would be:
A 30-year-old IT consultant earning £50,000 per year would pay £26.49 pcm for a £150,000 critical illness policy for 15 years. He would pay £32.04pcm for a £2,000 pcm income protection policy that pays out after 3 months of being unable to work and would pay until age 68 years.
If he were to suffer a stroke and was unable to ever work again, under the critical illness policy he would receive a single lump sum of £150,000. But, under the income protection policy, after three months, he would receive £2,000 per month for the next 38 years until he reached the age of 68. This would mean that he received a total of £906,000 in total.
If you are a Director of a Limited Company, it is worth considering whether you should take out a personal critical illness policy or whether you can pay it through your business under what is known as Key Person Cover (formerly known as Key Man Cover). There are advantages to both, and it will depend on your main priorities.
A personal critical illness policy will be paid tax-free and directly into your personal bank account if you suffer a critical illness. However, you will also have to the pay the premiums from your personal bank account and from your net income.
If you are paying your critical illness policy through your business, you have the option to claim the cost of it against your Corporation Tax. In most circumstances we advise our clients against this as, should the policy pay out, you would lose 20% of the payment in Corporation Tax because you cannot claim corporation tax relief on both the premiums and the pay-out. Of course, all advice is based on individual circumstances and in some instances, we will liaise with a client’s accountant to ensure the most tax efficient solution is achieved for them.