Wednesday 17 February 2016
Our financial protection terms glossary puts the key options in language that you can understand, with expert guidance to explain your choices and help you make the right decision.
If your loved ones depend on your income to keep up with bills, living expenses and mortgage repayments, then life insurance can protect them financially.
You can take out life insurance that will pay out in a lump sum or in regular payments. You can also choose between different types of cover. Depending on your expenses, specifically your mortgage repayments, one life insurance option might suit you better than the other.
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If you and your partner depend on one another’s income to pay the bills, it might be worth considering joint life insurance. Joint life insurance pays out if either one of the people signed up to it should pass away, however it won't pay out twice.
If you are unable to work due to illness or injury, income protection can help ensure that you and your family have fewer financial concerns.
“Income protection is usually designed to provide a tax-free income if you’re unable to work due to long-term sickness or injury,” explains Andrew Johnson, Money Expert at the Money Advice Service.
“You may have already considered your options for financial survival – such as an employer’s sick pay package, savings or relying on government benefits,” he continues, “but these options may not meet your income requirements and you could be off work longer than expected.”
A guaranteed premium – the amount you pay for your cover – will not change unless you have selected inflation-linked cover (read more about this under ‘inflation-linked cover’ below).
Whereas if you select reviewable premiums your insurer will periodically review how much you are paying and will have the right to change it should your situation, or the wider economic landscape, change.
“Guaranteed premiums will give you the security that your monthly payments will never change as you get older” says Andrew Johnson. “With reviewable policies there is a risk that future premiums may not be affordable.
“In general, younger workers can attract lower guaranteed premiums, which over the long term may work out cheaper than a comparable reviewable policy,” he adds.
Unlike income protection insurance, critical illness insurance will pay you a lump sum, rather than a monthly payment. The lump sum of money can be used how you wish. You might want to use it to pay off a mortgage, or make alterations to your home which might be needed following a serious illness or condition such as a stroke or cancer.
There are three main types of insurance policy when it comes to protection: level, inflation-linked and decreasing – but not every type of protection will have all three as options.
If you choose level cover, then the cover you receive from your insurer each month is fixed when you start your policy and won’t change. It also means that your life insurance lump sum will not change.
If you choose inflation-linked cover, the cover you receive will increase in line with UK inflation.
Protection policies can cover you for a set period of time, until retirement or when you’re well enough to work. So if you’re considering a long-term policy, it makes sense to protect the level of cover you have today against the risk of inflation,” recommends Andrew Johnson.
“This is because as prices rise, the level of cover you need today could be insufficient to cover your expenses in the future. Having an inflation-linked policy can give you the added confidence of meeting your current income requirements in the future.”
If you take out decreasing cover the premium remains fixed, but the money you would receive if the insurance pays out will decrease over the period of time your insurance lasts.
Typically this cover is designed to reflect the reducing amount you owe on a capital and repayment mortgage – essentially, as you owe less on your mortgage, you require less from your life insurance provider to pay it, so the lump sum payment reduces in kind.
Taking out one of these life cover options could help you to supplement your sick pay, meet your bills, protect your loved ones and stave off having to creep into your savings. However, it’s important to do your research first to discover the best option for you.