Life Assurance & Critical Illness Insurance

	Compare life and critical illness policies

Life assurance and critical illness insurance policies are protection policies that allow you to plan for the future comfort of your families. This guide explains how these policies work and offers hints and tips on choosing which is the right life assurance and critical illness insurance policy for you. 

• What's the difference between assurance and insurance?
• What is life assurance?
• What is critical illness insurance?
• What critical illnesses are covered?
• What affects the cost of my policies?
• How much cover do I need?
• Who should be insured in the family?
• What do I have to tell my insurer?
• Do I need to take independent financial advice?
• Will the taxman take a bite out of a policy payout?
• Who do I turn to if I have a complaint?

What's the difference between assurance and insurance?

Quite often you will find people talking or writing about life insurance when what they actually mean is life assurance. Although many journalists IFAs and even product providers now use the terms assurance and insurance almost interchangeably there is a difference between the two. Assurance means you are insuring for an event that will definitely happen one day - death or retirement. Insurance covers events that may happen but equally may not happen such as illness accident etc.

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What is life assurance?

Perhaps it should really be called death assurance! When you buy life assurance you are simply arranging for a sum of money to be paid out on your death. Of course the assurance industry makes it a lot more complicated than that. Policies may pay a lump sum or a regular series of smaller sums; payout may be guaranteed or may be on offer for only a limited period of time; both premium and payout may be fixed or may vary. 

Life assurance can be divided into two basic types - policies that offer protection only and those that have an investment link. Protection-only policies usually described as term assurance pay out if you die within a specified period but otherwise pay nothing. This is usually the cheapest way to provide financial protection for your family in the event of your death. In effect "term" policies are a bet - you are betting that you are going to die and the insurance company is betting that you aren't! 

Investment-linked life assurance includes endowment policies and whole of life policies. As well as paying out on death these build up an investment value that may be cashed in during your lifetime. Many types of pension scheme such as personal pensions including stakeholder schemes also count as investment-type life assurance. Providers of life assurance policies must be authorised by the Financial Services Authority FSA.

Whole of Life

A whole of life policy will pay out on the death of the life assured whenever death occurs provided that the policy is still in force. Premiums are payable either throughout life or until the life assured reaches a certain age stipulated in the policy - 75 is common when premiums cease but life cover continues. Unlike term policies because a whole of life policy has an investment element it will over time also have a surrender value.

 As payment of the benefit is inevitable each premium is made up of a mortality element and a savings element the latter to build up an investment fund to pay out the benefit on death. This has two consequences 

• Whole of life policies tend to be more expensive than term assurance for the same level of cover
• Whole of life policies possibly carry cash values on early surrenders dependent on the type of policy number of years in force and the companys investment performance. It is unlikely however that there would be any surrender value in the early years of the policy

Level Term 

Level term assurance pays out if you die or as in the case with some policies you are diagnosed as having a terminal illness during the term of the policy. If you live to the end of the term the policy expires and no payment is made. Similarly if you stop paying the premiums at any time cover will cease. However some policies may offer a waiver of premium option that allows the policy to remain in force under certain circumstances disability etc... If you live to the end of the term the policy expires and no payment is made. Similarly if you stop paying the premiums at any time cover will cease. 

Decreasing Term Assurance 

The lump sum payout on offer with decreasing term assurance as you might guess decreases in size over time. The advantage of the reducing life cover under this type of policy is that premiums are likely to be lower too. Decreasing term assurance is also described sometimes as mortgage protection assurance. It is commonly used to protect the repayment of a reducing debt - such as a repayment mortgage a loan school fees etc. Some policies may offer a waiver of premium option. 

Convertible Term Assurance 

The sum assured stays the same for the term of the policy. However for an additional cost you will have an option to convert this original plan or part of it to another type of policy such as an increasing term assurance a whole of life policy or an endowment without further medical evidence being required. If you stop paying the premiums at any time cover will cease. 

Family Income Benefit

Family Income Benefit FIB provides a tax free regular income which is paid out for the remaining term of the policy if you die. FIB can provide a replacement income and may be index-linked to inflation so that cover remains the same in real terms. If you live to the end of the term the policy expires and no payment is made. Similarly if you stop paying the premiums at any time cover will cease.

Death in Service Benefit 

Death in service benefit is the cheerful name for cover which is provided by your employer. If you die while employed then it will typically pay between two and four times your salary, a useful boost to your own assurance arrangements. However you should review your cover if your lifestyle changes or you move jobs.

What is critical illness insurance?

 Critical illness insurance pays out a lump sum on the diagnosis of a range of serious illnesses. Provided the patient survives a minimum period after diagnosis typically 21 or 28 days the cash is paid regardless of whether they make a full recovery. The number of conditions covered varies from insurer to insurer but they will include a heart attack, stroke and most forms of cancer. Each policy will specify exactly the range of illnesses that it covers. 

Advances in medical know-how are making it possible for people to survive and even enjoy life during and after suffering a serious health setback. However if you survive but are not well enough to work you will still have the mortgage and bills to pay. In fact its likely that your living costs will increase if you need some sort of nursing care or have to adapt your home accordingly. Therefore critical illness insurance is designed to cover both loss of earnings and a potential increase in living expenses. 

Critical illness cover first appeared in the UK in the late 1980s. The concept originated in South Africa developed by the brother of the famous heart surgeon Dr Christian Barnard. Although initially offered as an "add-on" to term whole of life and endowment policies it is now also available as stand-alone insurance cover. 

There are broadly two types of critical illness policy, whole of life and term cover. As their names suggest whole of life lasts as long as you live whereas term is for a fixed period; usually 10 or 25 years. 

When buying a policy you have to choose between guaranteed and reviewable rates. Guaranteed critical illness polices are so called because they charge the same premiums for the whole of the policy. A reviewable policy on the other hand has rates that may be altered by the insurer. A typical reviewable policy will have premiums fixed for the first five years and then reviewed at regular intervals afterwards whether every five years or even every year. 

The policy holders advancing age and likelihood of developing serious disease are factored in from the outset so there is no age banding once the policy starts - unlike private medical insurance. 

If you already have a life assurance policy you may think critical illness cover is a waste of time but it offers very different protection. Your life assurance policy will only pay out if you die whereas critical illness insurance will pay up as soon as you are diagnosed with a life-threatening illness.

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What critical illnesses are covered? 

Different policies will cover a different number of critical illnesses. Each policy will only cover the conditions set out in the product literature that your financial adviser or insurance company gives you and no others. According to the Association of British Insurers ABI for a policy to be called "Critical Illness" it must cover three core conditions. These are a heart attack, cancer and stroke. In addition since April 2006 the ABI has carried a list of 23 model conditions which form its Statement of Best Practice SoBP. In order to be competitive - although not by law - insurers will have to cover all 23 conditions although some providers such as Bupa offer a lot more. 

The ABI also sets down conditions that will typically be excluded from critical illness policies. These include drug abuse, AIDS and even contracting a terminal illness when living abroad. Some types of cancer may also not be covered. The full definition under each heading in your policy document shows what your policy covers. Its crucial to read these carefully as finding out you are not covered on claiming can only make a devastating situation worse. Being totally honest on your application is also crucial - insurers hire entire departments whose job it is to investigate the validity of claims. If you don't understand anything or require more information ask your insurer. 

Bear in mind that just contracting a form of the stated illness may not be enough to claim. Gruesome as it seems, the ABI also sets down model definitions for the 23 conditions of exactly what constitutes each one. For example cancer will have to be in a certain stage of advancement and - even more sickening - third degree burns will have to cover 20% of your body.

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What affects the cost of my policies?

The cost of cover will be driven by a variety of factors including your age, sex and occupation. Premiums will be sharply higher if you smoke. Some jobs that you might not consider risky can affect the cost. For example teachers, chefs and investment bankers may pay more for critical illness cover because of the effect of stress. 

As with all types of insurance, life assurance policyholders pay premiums into a common fund from which all claims are paid out. In order for the insurer to be certain there will be sufficient funds to pay out all the claims there has to be a relationship between the premium charged and the benefit given under a policy. This is easier to predict with life assurance and critical illness insurance than with other types of insurance because mortality and illness tables can be used to predict the number of deaths and illnesses and therefore the number of likely claims. 

However the tables don't always tell the whole story. In the late-1980s life assurance costs rose sharply with companies worrying about the potential impact of AIDS. When it became clear that there was not going to a mass impact on UK death rates from AIDS, premium costs started to come back down again.

Equally advances in medical care have been responsible for soaring critical illness premiums since the mid-1990s. Costs have risen because insurers have had to meet an increasing number of claims which have come about by the earlier diagnosis of a critical illness due to medical advances.

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How much cover do I need?

Too many of us in this country have no life cover at all. According to The Times 18 million adults in the UK are without it 15/06/2006 - and many people that do have cover are not insured for enough. There are four reasons for the protection gap ostrich syndrome - people simply don't want to think about dying or falling ill; confusion over the appropriate cover; mistrust of financial professionals; and expense - people wrongly see cover as costly. 

Many people choose to insure their lives for £100000. It is a nice round sum and it sounds like a lot of money - and it is. But is it enough for surviving dependants to live off? Can it pay off all your various debts - mortgages loans and credit cards - and still leave a big enough sum to generate an income? 

People hugely miscalculate the rate at which a family can get an income from a lump sum. At current levels without risking the capital that £100000 may pay a maximum annual income of little more than £5000. 

To calculate the amount of cover you need, you will need to take account of the mortgage, the potential cost of replacing family income for each earner, the cost of childcare and any education expenses. 

Some life assurance experts will suggest you consider a policy that covers 20 times your salary. The idea based on an assumed interest rate of 5% is that this lump sum would provide an income equivalent to salary. 

However while this may sound a lot it may still not provide adequate cover for someone who may see a rapid increase in salary over the next few years or someone who is paid performance-related bonuses and is about to hit their prime income-earning years. There are hard choices to be made about how much cover you are prepared to have.

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Who should be insured in the family?

 Life assurance is not the sole province of the income earners. A family with young children should also consider the impact of the loss of the main child-carer. Equally given that you are five times more likely to be seriously ill than to die before the age of 65 you may wish to consider critical illness insurance as well. Source Daily Telegraph 26/01/2005. 

Compare life assurance & critical illness insurance here

The person on whose life the policy depends is called the life assured. However although the person who owns the policy and the life assured are frequently one and the same this is not necessarily the case. Spouses and civil partners may take out life-of-another policies on each other. Life-of-another policies require that you prove an insurable interest in the person whose life you are insuring; however spouses and civil partners are assumed automatically to have an insurable interest in each others lives. 

Policies may be taken out jointly by two persons assured - for example husband and wife - on their joint lives. Furthermore although the vast majority of joint life policies have two lives assured it is theoretically possible to have more if insurable interest exists. Almost any type of life policy may be arranged on a joint life basis. 

There are two kinds of joint life policy - first death and second death contracts. A joint life first death policy pays out on the death of the first life assured to die commonly for family protection or mortgage cover. A joint life second death policy pays out on the death of the second life assured to die. These are sometimes called joint life last survivor contracts and are commonly used for inheritance tax planning. 

Policy beneficiaries are usually close family members but you may specify the beneficiaries when you take the policy out.

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What do I have to tell my insurer?

You must tell the policy provider all relevant or material facts. If you don't you may find that the policy does not pay out. A material fact is one which would influence an underwriter whether to accept the risk and the terms and conditions that should apply. If you fail to disclose or misrepresent a material fact this may result in you taking out a policy that you may not otherwise have been able to get or taking out a policy on more favourable terms.

If the policy provider discovers these facts after the event, which they usually do when a claim is made if not before you are highly unlikely to receive a pay out. The providers legal remedy is to avoid the policy which means the insurer is entitled to treat the policy as though it never existed. Unless actual fraud is involved the insurer will normally return the premium and will not pay out on any claim made under the policy. 

Non-disclosure is the term used to describe the situation where a customer fails to reveal a relevant fact when applying for - or renewing - an insurance contract. The legal position is quite straightforward - an insurance contract is a contract of utmost good faith which means that all parties to the contract are under a strict duty to deal fully and frankly with each other. If you don't you shouldn't expect the policy to payout. 

If you believe your policy provider is treating you badly you can seek redress ultimately through the Financial Ombudsman Service.

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Do I need to take independent financial advice?

A life assurance policy is a long-term commitment. An independent financial adviser can help you decide what products are suitable for you. Any person advising on or selling life assurance or critical illness insurance must be authorised by the Financial Services Authority as either a company representative tied agent a multi-tied agent or an independent financial adviser. 

Exactly how much life assurance/critical illness insurance you need to have will depend on your circumstances. An independent financial adviser will be able to show you what the different types of policies available offer and how they may suit you. Advisers will also be able to assist with inheritance tax planning which is becoming increasingly relevant to many people. 

You should certainly never surrender a life assurance policy without taking expert advice. 

When you apply for a policy every effort will be made to ensure your application for life assurance is made in the full knowledge of all its terms and conditions but all these policies have a "cooling off" period of at least 14 days. During this time you can tell the insurer you do not want the policy and receive a refund of any initial premiums you have already paid. Be aware that with unit-linked whole of life policies it may not be the full amount you originally paid if the value of the units has decreased since purchase. 

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Will the taxman take a bite out of a policy payout?

The premiums you pay for your life assurance or critical illness insurance policy are paid out of your net after tax income. You receive no tax relief on these payments unless your policy was taken out before 14 March 1984. If your policy is older than this you will still be receiving Life Assurance Premium Relief - a tax relief of 12.5% on the premiums paid into policies lasting for more than 10 years. 

While you get no tax benefits for making payments into a life assurance policy taken out now, the payout is generally free of deductions for personal income tax - it is tax-free as is the payout from a critical illness insurance policy. 

However although the proceeds of a life assurance policy are tax-free by themselves they are deemed to be part of the estate of the deceased. Thus if the payout when added to the estate pushes the entire estate over the inheritance tax threshold then any amount over the threshold  £312000 for 2008/09 would be liable for tax at 40%. 

In order to avoid paying tax on a life assurance payout policyholders may opt to write the policy in trust. Placing the policy in trust ensures that the proceeds remain outside the deceaseds estate and that they are available to the trustees to pay out to the desired beneficiaries almost immediately upon death whereas if they form part of an estate they may be tied up in probate for several months. A life policy may also be written under trust to be used to pay an anticipated inheritance tax bill arising from your estate.

Who do I turn to if I have a complaint?

Life assurance and critical illness insurance providers operate under the rules of the Financial Services Authority. If you have a complaint about your life assurance or critical illness insurance policies you should in the first instance take your complaint up with the salesperson financial adviser or insurer. 

Your policy document will provide details of the insurers complaint arrangements. The aim will be to ensure that your complaint will be thoroughly investigated at the right level. However if you are not satisfied with the way they deal with your complaint you may contact the Financial Ombudsman Service on 0845 080 1800. The service provided is free to consumers and the decisions made are binding upon the policy providers but do not affect your right to take legal action. 

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2009-03-09 16:53:12 © Moneyextra.com