LIFE AND PROTECTION INSURANCE EXPLAINED
Most of us would like to think that when our lives come to an end, we’ll be old, our loved ones will be financially secure and our financial responsibilities will be taken care of. Sadly, this situation isn’t always the reality. And, even if we do live a long and happy life, we may at some point suffer an illness or accident that prevents us from working, or makes us a victim of unemployment.
It’s therefore sensible to consider how best you’d protect your finances and those of your family if the worst were to happen.
This website will explain the types of Life and Protection Insurance available, what they’re used for, and how our mortgage advisers can help you choose the solution that’s right for you.
WHAT IS LIFE AND PROTECTION INSURANCE?
Life and Protection Insurance policies are designed to protect you and your family from the financial consequences of death, a serious accident or illness, or unemployment.
Far from being a luxury, Protection Insurance should be considered essential, especially if you have a family or people that rely on your income.
If you suffered a serious illness or injury, you may lose your income – this could lead to you losing your home. Similarly, if you died would your loved ones be able to maintain their current lifestyle without your income?
You may already have Life and Protection Insurance in place, but it’s still worthwhile reviewing your current cover levels. Personal circumstances can change regularly so it’s important to ensure your level of cover is appropriate.
Whether it’s coming to terms with the loss of a loved one, dealing with a serious illness, the consequences of an accident or losing your job, it can be comforting
to know there are no additional financial worries to take care of.
WHY DO I NEED IT
We’re generally laid back about personal risk, but it’s worth considering the facts:
HOW COULD LIFE AND PROTECTION INSURANCE HELP YOU?
- Pay off your mortgage
- Maintain your or your family’s lifestyle
- Pay for replacement childcare
- Cover school or university fees
- Pay for specialist nursing support
WHAT IT DOES
Life Insurance (sometimes known as Life Assurance) helps provide financial security for people who depend on you, should you die.
WHY YOU MIGHT NEED IT
Although money can’t replace a loved one, it can help those left behind to weather the financial storm. For example, it could pay off the mortgage or provide an income to help cover regular household expenditure.
TYPES OF LIFE INSURANCE
There are different types of Life Insurance - the most appropriate type for you will depend on your circumstances. Life Insurance will pay out either a single lump sum (sum insured) or a regular income when you die.
This is the simplest type of Life Insurance. You choose how long you’re covered for, eg. 20 years (the term), and the policy pays out if you die within the agreed term. You can also take out term cover as a couple, with the policy paying out on the first death only during the term. There are several different types of policy:
- Level: The amount of cover and premiums remain the same
- Increasing (or Index-linked): The amount of cover and premiums gradually rise in line with inflation
- Decreasing: The amount of cover gradually reduces. Generally used to protect a repayment mortgage where the amount of the loan outstanding reduces each year
- Renewable: You can extend the original term of the policy
- Convertible: Lets you convert the policy to Whole of Life Insurance
Family Income Benefit Insurance
This is essentially the same as Term Insurance, but instead of paying a lump sum when you die, it will pay out a regular income instead. This type of payment may be more suitable where the main purpose of the policy is to provide ongoing financial support to dependants.
Whole of Life Insurance
Whole of Life Insurance pays out a lump sum when you die, whenever that is, as long as you are still paying the premiums.
CRITICAL ILLNESS INSURANCE
WHAT IT DOES
Critical Illness Insurance pays out a tax-free lump sum on the diagnosis of certain life-threatening or debilitating (but not fatal) conditions including heart attack, stroke, cancer and major organ transplants. This list will vary depending on the insurer, as will the exclusions for making a claim.
Critical Illness Insurance often comes as an optional addition to a Life Insurance
policy, but can also be purchased on its own. Policies usually only pay out once, so they don’t necessarily replace your regular income, but you can use the money towards medical treatment, your mortgage or anything else you choose.
WHY YOU MIGHT NEED IT
Many people buy Critical Illness Insurance when they take on a major commitment, like a mortgage, or start a family. However, since we’d all like to have our financial commitments lightened if we were to suffer a serious illness or injury, the cover is relevant for most of us at any time.
REPLACING AN EXISTING CRITICAL ILLNESS POLICY
If you already have Critical Illness Insurance you should think carefully before you cancel your existing policy and take out a new one.
For example, if you’ve developed any illnesses since you first took out the policy, you may lose some of the benefits when you replace it. That’s because pre-existing medical conditions may not be covered by the new policy.
Recent advances in the treatment of certain conditions, such as cancer, may also have an effect, as a new policy might be more restrictive than an older one when it comes to paying claims for certain conditions.
Our mortgage advisers will be able to quickly identify the issues and help you make the right decision about your Critical Illness Insurance.
INCOME PROTECTION INSURANCE
WHAT IT DOES
Income Protection Insurance pays out a regular tax-free replacement income if you become unable to work because of illness, injury or – with certain policies – unemployment. It could help you keep up with your mortgage repayments, rent and other day-to-day living costs until you are able to return to work.
Cover can be purchased that will pay you a monthly income either until your planned retirement age or for a limited amount of time (which will result in a cheaper premium). Income Protection policies also have a waiting period (sometimes known as a deferred period) before they pay out, which begins when you become unable to work. The longer the waiting period, the lower your premium. It’s a good idea to find out what your employer would pay you if you were unable to work and what State benefits may be available, so you can choose an appropriate waiting period.
Our mortgage advisers will consider these points, along with any other insurance policies you already have, to help you decide. The premium you’ll pay will vary depending on these factors and others such as your age, health, the nature of your job and, of course, the level of income you wish to protect.
WHY YOU MIGHT NEED IT
If you become ill or suffer an injury during your working life, an Income Protection policy can help protect against any possible loss of income.
OTHER TYPES OF PROTECTION INSURANCE
Payment Protection Insurance and Short Term Income Protection Insurance (along with Mortgage Payment Protection Insurance and Accident, Sickness & Unemployment Insurance) can provide a monthly income to help cover your regular outgoings if you can’t work due to an accident, illness/injury or, often as an optional extra, unemployment.
There are important differences between these products and Income Protection Insurance, the key one being that they will only pay a replacement income for a limited period of time – usually between 12 and 24 months. In contrast, Income Protection Insurance will pay out for as long as you are unable to work (up to the policy expiry), although shorter payment periods are available from some insurance companies.
WHAT ELSE DO I NEED TO KNOW?
WHAT COVER WILL I NEED AND HOW MUCH WILL IT COST?
This will very much depend on your own personal circumstances, but Your Free Mortgage Adviser can quickly help you calculate an appropriate level of cover by considering things like:
• Your mortgage and/or any other outstanding loans
• Your current income and future income expectations
• Any childcare needs if you or your partner were to die or suffer serious illness or injury
Clearly, the higher the level of cover you decide you need, the more it will cost. Your age, medical history and occupation are among other factors that will also have an effect.
However, Life Insurance premiums remain extremely good value and many people are surprised at how affordable putting cover in place can be.
WRITING YOUR LIFE INSURANCE IN TRUST
A Trust is a legal document that allows you to specify what will happen to your
money after your death. If your Life Insurance policy is written in Trust, any payout will go to the Trustees who will ensure the funds are distributed to the correct beneficiaries.
A Life Insurance policy that has been written in Trust does not form part of your legal estate and is not subject to Inheritance Tax, allowing more of your money to pass to your beneficiaries. Life Insurance companies also tend to pay the money out much quicker under these circumstances, making things easier financially for your beneficiaries.
Even if your partner is your beneficiary (and therefore the Life Insurance payment would be exempt from Inheritance Tax under current rules), it can be worth putting your Life Insurance in Trust to ensure payment is made as quickly as possible. Our mortgages advisers can let you know if your Life Insurance Cover should be placed in Trust and can easily arrange this for you. There’s normally no charge for this service if it’s arranged when the policy is taken out. Trust advice is not regulated by the Financial Conduct Authority.
KEEPING YOUR COVER UP TO DATE
You should always consider reviewing your level of Life and Protection Insurance whenever there are significant changes in your life. Getting married or moving in with a partner, buying a home, having children or changing your job can all have an impact on your financial obligations.
Even if your circumstances don’t change significantly, it can be worth reviewing your arrangements to see if you can find a more suitable policy. Having said that, it’s important to ensure the cover of any new policy meets your needs, and that you’re aware of any benefits you may lose compared to your existing policy.
LOOK BEYOND THE PRICE
Finally, while it may be tempting simply to opt for the cheapest policy available, it is important to bear in mind that whilst many products may look the same, there can be important differences between them that can be difficult to spot. This is particularly important with Critical Illness Cover and Income Protection Insurance, where the cover available from different providers varies more significantly. Care should be taken to select a policy that is most suitable for your particular needs. Our mortgage advisers will be able to help you make the right selection.
The individual named in a Life Insurance policy to receive the funds paid out on the death of the Insured.
Convertible Term Assurance
A type of Life Insurance that enables you to convert a Term Insurance policy into a Whole of Life policy or, in some cases, add an investment element.
Critical Illness Insurance
Offers you and your dependants protection by paying out a lump sum (or regular income for a predetermined period) should you be diagnosed with a specified critical illness during the term of the policy.
Decreasing Term Assurance
The sum insured steadily decreases over the course of the insurance term. It’s traditionally used to cover the reducing balance on a repayment mortgage.
Circumstances under which the policy won’t pay out, be they standard exclusions (eg. death due to alcohol or drug abuse) or specific to you (eg. related to your medical history).
Family Income Benefit
Pays a regular, tax free income to your family in the event of your death, instead of a single lump sum.
Guaranteed and Reviewable Premiums
The cost of premiums can either be guaranteed throughout the term of the policy or reviewed at regular intervals by the insurer, and may increase.
Insurance covering the payment of a proportion of your salary for a given time if you are unable to work because of sickness, injury or – with some policies unemployment.
Increasing (or Index-linked) Cover
A convenient way to compensate for the adverse effects of inflation over the life of the insurance policy. Increasing (or Index-linked) Cover involves both the sum assured and the premiums payable being increased in line with inflation, typically by being linked to a known inflation measure, such as the Retail Prices Index (RPI), or a pre-determined fixed percentage
Joint Life Cover
Can be purchased by couples, whether married or not. Joint cover pays out on the first death (Life Insurance policy), or the diagnosis of a serious illness or receiving a serious injury (Critical Illness policy). See also Single Life Cover.
Level Term Assurance
This is the simplest and most straightforward Life Insurance. In exchange for your premium the insurer agrees to pay a fixed, guaranteed lump sum should you die during the term of the insurance.
Life Insurance/Life Assurance
Interchangeable terms for insurance that pays out upon the death of
Payment Protection Insurance
Also known as Mortgage Payment Protection Insurance; Accident, Sickness & Unemployment Insurance; or Short Term Income Protection Insurance, this type of policy can pay a monthly income to help cover your mortgage/rental payments and regular household expenses if you can’t work, due to an accident, illness/injury or unemployment - for a limited period of time. Unemployment cover is often an optional extra on these policies, or can sometimes be purchased as standalone cover.
The legal document that states all the details and terms of the insurance
The individual or couple that owns an insurance policy.
The amount you need to pay to the insurance company for your cover.
Renewable Term Assurance
Gives the policyholder an option to renew the insurance at its expiry date without having to provide a medical report.
Short Term Income Protection Insurance
See Payment Protection Insurance.
Single Life Cover
A policy that protects one person. See also Joint Life Cover.
Terminal Illness Cover
Pays out if you are diagnosed with a terminal illness, subject to certain conditions.
Total and Permanent Disability Cover
Offers protection in the form of a lump sum or regular monthly payment if the policyholder suffers a total and permanent disability during the term of the insurance.
A way of putting something valuable (in this case your Life Insurance policy) aside to ensure the money goes to the people you want it to when you die. Putting the policy in trust can help to avoid Inheritance Tax.
Waiver of Premium
An optional benefit that provides continued cover (without further premium payment) if you become unable to work due to injury, sickness or unemployment.
Whole of Life Insurance
A form of Life Insurance that only expires upon the death of the insured, as long as premiums continue to be paid.
Our mortgage advisers are members of Openwork, one of the UK’s largest financial advice networks. The Openwork group of companies comprises over 2,000 Advisers, who can help protect you, your family and your possessions, and help you plan for your future.
Openwork firmly believe in the value of personalised advice. Advisers are trained to a high standard and the quality of the advice they provide is constantly assessed. When it comes to Life and Protection Insurance, we have access to award-winning products from leading insurers.
WHAT HAPPENS NEXT?
GETTING TO KNOW YOU
Your adviser will complete a comprehensive Fact Find with you, either face to face or over the phone, so that they can identify the products which suit your needs.
RESEARCHING THE OPTIONS
Using their expert product knowledge, and Openwork’s analysis software, your adviser will put together a personal recommendation for you.
RECOMMENDING THE RIGHT SOLUTION
Once your adviser has identified the options available, they’ll meet with you again or discuss their recommendations over the phone, and write to you so you can review what they have suggested and why.
Assuming you’re happy with your adviser’s recommendation, they’ll work with you to complete the application forms and stay in touch throughout the process – and into the future.
Speak to a Free Mortgage Advice Protection Consultant
Office: 0330 100 5434 - Mob: 07944238788
Normal Business Hours: Mon-Fri 9.00 - 18.00