Common Types of Term Insurance

There are several types of term insurance, so it’s important to understand which is likely to suit you best.  All payouts from term insurances are usually tax-free, but there is typically no maturity or surrender value at any time – i.e. they are “insurance” policies.  We’ve listed the most common ones below:

Level Term Insurance

Level term insurance pays out a fixed lump sum if you die during the policy term. This lump sum doesn’t change over the term of your policy.

This is usually used to provide a fixed amount for your dependent spouse or children.  This is also used to protect your mortgage if it is interest-only as the mortgage balance does not change throughout the term.

Mortgage Protection

Also known as Decreasing Term cover.  With this type of insurance, the amount of cover reduces over time, which is perfect for a repayment mortgage that also goes down over time.  The premiums are lower than for level term insurance.

TIP: For both level and decreasing covers, make sure the amount of cover matches your mortgage balance and the length of cover matches the remaining years left on your mortgage (rounded up).  E.g. if your mortgage has 15 years and 4 months left, you should choose a 16-year policy term.

Level versus Decreasing Term Insurance

Critical Illness Cover

This pays out a lump sum if you’re diagnosed with a defined critical illness during the policy term.  The illnesses covered will differ from insurer to insurer.

You can add critical illness cover to any of the two life covers above (level or decreasing) or as a standalone policy.  You can take this cover out even if you do not have a mortgage.

Whether you are single or have young children, critical illness can be a vital cover for you.  You will have peace of mind knowing that should you suffer from a critical illness, you will receive a lump sum payout which may be used towards paying off a chunk of your mortgage or simply to live off while you are still recovering.  This can give you just the breathing space you need.

TIP: You should not choose an insurer’s policy based on price alone.  Unlike life cover, there’s more nuts and bolts to a critical illness cover.  The comprehensiveness of the cover can be a more of a deciding factor.  You should look at the total number of conditions covered for each policy as well as ‘partial payouts’ for less severe conditions.

Joint Life insurance

If you are married or have joint financial commitments (such as a mortgage) with a partner or relative, you may want to consider a joint life policy rather than two single policies. The advantage of this is that premiums may be cheaper than if you have two separate plans.  But the drawback is that the insurance will only payout once when a policyholder dies, at which point the policy ends. If the remaining partner wishes to remain insured, they will then have to look for another policy when they may be much older and premiums will be considerably higher. In the worst case scenario, they may never be insurable again if they had developed a serious illness since they took out the policy.

Opting for two separate policies means that the surviving person will still have cover in place even if the other person dies. This has the advantage that if you have young children, they will still be financially protected, and the surviving person does not have to look for new cover.

Income Protection

Income protection insurance will provide you with financial support if you are unable to work because you’re ill or injured.

It ensures you continue to receive a regular income, usually capped at between 50%-66% of your current salary (but the benefits are tax-free) until you retire or are able to return to work.  You can claim on it as many times as you need to while the policy lasts and your monthly premiums will not go up (guaranteed premiums).

  • Own Occupation – the most comprehensive cover uses an “Own Occupation” definition of incapacity, meaning that the policy is designed to pay out if you are unable to do your own job occupation, as opposed to “Any Occupation” definition which is less comprehensive.
  • Age Banded premiums – some insurers allow income protection policies’ premiums to be “age banded”, which means that the premiums will often start off low age you’re younger, and rises as you get older.  The benefit of this policy is that you could pay quite low monthly premiums due to your age so it helps with affordability, but your premiums will rise in future.
  • Deferred Period – this is the “delay” period between making a claim for being unable to work and the time the income payments start. The deferred periods available are 4, 8, 13, 26, 52 weeks. Typically this should be linked to your existing sick pay from work (e.g. if you have 6 months sick pay, you should select a deferred period of 26 weeks). The longer the deferred period, the lower the monthly premiums and vice versa.
  • Benefit Payment Period – this is different from deferred period and relates to the the maximum length of time the policy would pay income for per valid claim.  Some insurers offer a limited 2 year benefit payment period, which means the monthly premiums are cheaper.  For a more comprehensive cover, you will want to select the policy which allows the longest payment period (until the end of your policy).

TIP: For more budget friendly income protection, you can consider “Age Banded Premiums” and limiting the Benefits Payment Period to 2 years.  For more comprehensive cover, you should choose products that are not Age Banded and have no limitations on the Benefit Payment Period.

Whole of Life Assurance

Whole of Life Assurance is a a life assurance policy designed to pay a tax-free lump sum upon on your death, whenever it happens.  i.e. as the name suggests, it covers you for the whole of your life. Hence, unsurprisingly, it is usually costs more than a term insurance quote as a pay-out is guaranteed.

Typically, this policy is used to bequeath sums of money to loved ones, cover for funeral costs in future, and cover for potential inheritance tax bill on larger estates.

TIP: As this policy would extend into your retirement, you’ll need to ensure that you have enough disposable income to continue paying the monthly premiums.

Accident, Sickness and Unemployment (ASU)

With this policy, you have three cover options to choose from:

  • accident and sickness
  • unemployment
  • accident, sickness and unemployment

You are free to choose which one best suits you. For example, you may already have an Income Protection policy and so you’re only  concerned with unemployment insurance.

Alternatively, you might be self-employed and therefore redundancy cover is not valid for you, so will only want insurance that covers you if you have an accident or become ill.

Or, quite simply you may want the full ASU cover for greater peace of mind.

Similar to an Income Protection plan, you will have to choose a Deferred Period (see above).  Also, you will typically be presented with two types of payment options on your application:

  1. Back to Day One,
  2. Standard.

With the Back to Day One option, the insurer will make the first benefit payment 1 day after the deferred period ends.  So if you have a 30 day deferred period, this would be day 31.

And the Standard option, the insurer will make the first benefit payment 31 days after the deferred period ends.  Again, with a 30 day deferred period, this would be day 61.

TIP: Back to Day One option will cost a little more as it pays out quicker.  So if you prefer to wait, you can either increase the deferred period, and/or choose the Standard option to reduce your premiums and fit your budget.

Disclaimer: This article is for generic information only and should not be construed as personal financial advice.