Life Insurance AKA Life Assurance or Life Cover
All three terms nowadays mean the same thing, an insurance policy that pays out if you die, but has no value if you don’t. There are many types and the term is often used generically to include all forms of personal financial protection, all aspects of which are covered briefly below.
- Accident, Sickness and Unemployment (ASU) - also known as Mortgage Payment Protection Insurance (MPPI)
Tax-free replacement income to cover monthly mortgage payments and other regular outgoings, in the event of ill-health or unemployment, usually providing cover for up to one year. An inferior product to income Protection with Unemployment Cover.
- Cash Back Life Cover
Pays out if you die during the term of the policy or returns some money back at the end if you don’t die. While that sounds perfect, these policies are never as good value as paying less for the cover an investing the difference yourself. No IFA recommends them.
- Critical Illness Cover (CIC)
Pays out a lump sum when you are diagnosed as having one or more very serious medical conditions, as specified in the policy. Policies vary greatly in comprehensiveness and quality and almost all sold include life insurance. CIC is thus ideal for mortgage cover and as a top-up to Income Protection.
- Family Income Benefit (FIB)
This is life insurance that, instead of a lump sum, provides a tax free annual income until the end of the term specified at outset. That makes it much lower cost and thus ideal for young families who need lots of cover on a tight budget.
- Income Protection (IP)
The one cover EVERYONE (except the seriously rich!) should have. It provides a tax-free replacement income in the event of your not being able to work through ill health. The income lasts until you either return to work, die, or the policy term expires. It can be written in conjunction with Unemployment Insurance that normally pays out for one year of unemployment.
- Permanent Health Insurance
Permanent Health Insurance is also known as income replacement insurance, income protection or long-term disability insurance.
It's designed to pay out a regular monthly tax free income if you're unable to work.
- Terminal Illness Benefit (TIB)
Not to be confused with CIC, this benefit simply allows those who are diagnosed with less than 12 months to live to claim early on a life insurance policy. The benefit is often included with life cover at no extra cost.
- Real Life Cover (RLC)
A straightforward all in one policy that provides balanced levels of life cover, income protection and critical illness cover.
- Term Life Insurance/ Assurance
The overall term for the most frequently bought type of Life Insurance. It comes in the following varieties, each being suitable for specific purposes and situations.
- Level Term Assurance (LTA)
Life insurance that pays out a fixed lump sum if you die within the specified period of the policy. It almost always includes Terminal Illness Benefit.
- Increasing Term Assurance (ITA)
Life insurance that increases every year on a voluntary basis without the need for a medical. Not as popular as Level Term, but it should be as people may require additional cover in line with increases in their income and inflation.
- Mortgage Protection Assurance (MPA)
Life insurance where the lump sum reduces in line with the outstanding mortgage balance over time, using reasonable interest rate assumptions.
- Decreasing Term Assurance (DTA)
Life insurance that reduces at a flat rate each year as opposed to matching a mortgage, which typically decreases more slowly in the early years.
- Reducing Term Assurance
Simply a wrong name for either MPA or DTA and easily confused with Renewable TA! So not a valid term!
- Renewable Term Assurance (RTA)
Typically short term Life insurance that can be renewed, without medical underwriting, every 5 - 10 years. This makes it less expensive initially, but normally more expensive in the long run. As Life Insurance generally has grown less expensive so this policy has waned in popularity.
- Convertible Term Assurance (CTA)
Level term life insurance with the built in option to convert the policy into something different at a later stage. Not much used nowadays.
- Waiver of Premium
An optional extra on all insurances that covers the cost of premiums during periods of ill health.
- Whole of Life Insurance (WOL)
Open ended life cover that in theory will run on until your death whenever that is. In practice however it’s only practical use is for the payment of Inheritance Tax. It’s available either with an investment element or as a more expensive guaranteed rate, non-investment contract.
Other regularly used terms
In financial services, getting advice means that the seller has to make sure that what they are recommending is suitable for you. If it proves not to be then the Ombudsman can help you claim redress. Not all sellers give advice, but all should; at least in our view.
- Guaranteed and Reviewable Premiums
Guaranteed rates will stay the same throughout the term of the policy. Reviewable rates can be reviewed at the insurer's discretion (usually after the first five years).
Policies can be linked to inflation where premiums and benefits increase annually. Most allow for this to be waived or selected each year.
- Total and Permanent Disability (TPD)
A contentious Benefit offered by Critical Illness Cover, which covers any illnesses and medical conditions not listed, but only where there is certainly no long term prospect of recovery.
As a rule, every life insurance policy should be written in trust. While there are many variations, a trust is normally a very simple legal instrument that causes the proceeds of the policy to be paid swiftly and without any tax to those you want to benefit. It avoids all delays connected with probate, wills and the lack of them.