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Life cover

What is it?
Life cover is an affordable type of insurance policy which, during the term of the policy, will pay out a (usually) tax-free cash sum (the 'sum assured') to the beneficiaries of the insured person in the event of the insured person's death. In the majority of cases, life policies in the UK will also usually pay out if the insured person is diagnosed with a terminal illness, with less than 12 months to live. Life policies can be taken out by one person, or two (sometimes more) people can apply for a joint policy. In the latter case, the parties need to have an insurable interest (eg: spouse/partner, joint holders of a mortgage, etc). In the case of joint policies the sum assured can either be paid out in the event of the first death or second death.

What will it NOT cover me for?
Life policies usually contain certain exclusions (ie: circumstances in which they won't pay out). Exclusions vary between insurance companies, but these are fairly common: Pre-existing conditions at the time the policy was taken out Failure to follow medical advice Hazardous sports and pastimes HIV/AIDS (usually unless as a result of a blood transfusion or rape) Living abroad (certain countries excepted) Self-inflicted injury War & civil commotion Life cover may also not be available to everyone, due to occupation, health or family history.

Why should I have Life Cover?
Do you have a mortgage? Are you sure that your mortgage would be paid off if you die? If not, you could be leaving your dependants with a large debt and the risk of losing their home. Do you have dependants? If so, life cover isn?t something you should ignore. However financially comfortable you are at the moment, things could be very different for the people you care about if you die. Are you the main breadwinner? If you are have you considered how your family would cope without your income? Do you rely on your partner's salary? How would you cope without your partner's income? If you currently stay at home and look after the family, how would your partner cope if you were no longer around? They may have to give up work to raise your children or pay out for childcare. THINK - Whilst you could well have other savings and investments, the loss of a regular income could significantly reduce the income that your family has to meet monthly outgoings, such as childcare and schooling. Even if your family is no longer dependent upon you, would you or your partner be forced to abandon retirement plans and have to continue working for longer than planned if you lost one income? 

Types of Life Cover:
The 'term' or period covered by the policy will often be linked to the term of your mortgage, or you may choose to take out a policy to cover you until a planned retirement date. Alternatively, you could choose to take out a 'Whole of Life' policy which would cover you until your death, whenever that might be. There are two main types of life cover which basically relate to the sum paid out in event of a claim. Level - This is where the sum paid out remains constant throughout the term of the policy, ie: it will pay out the same amount in the first year as it would in the last year. Decreasing -This type of policy would typically be taken out to cover a repayment mortgage. The sum paid out would decrease by a certain amount over the term, usually in line with the reduction in the amount of mortgage outstanding.

Term Insurance
Term insurance is the cheapest form of protection and it can offer high levels of life cover for a relatively low premium. The term and sum assured are often linked to the term and amount on your mortgage and can be on either a level or decreasing basis. Term assurance is sometimes offered combined with critical illness cover.

Family Income Benefit
Family income benefit plans are a form of decreasing term assurance. It is a type of term assurance in which, following the death of the life assured, instead of a lump sum, installments are paid to the beneficiary for the remainder of the policy term this usually takes the form of either a monthly or annual payment. If the life assured lives to the end of the term, no benefit is payable. This type of policy is a particularly good idea if you have children as it can be used to pay for childcare costs or replace income if your partner has to give up work to care for the children following your death.

Whole of Life
These plans are life assurance policies, designed to provide the policyholder with cover for their entire lifetime. The policy pays out a (usually) tax free sum when the policyholder dies. This type of policy is often taken out with the intention that the lump sum paid out will help mitigate the effect of any inheritance tax. If a joint policy is being used for this purpose, it usually is set up to pay out on the second death instead of the first. Depending on the individual policy, policyholders may have to continue contributing to the plan right up until they die, or they may be able to stop paying premiums once they reach a stated age, even though the cover continues until they die. Some plans also offer cover for additional benefits, such as a lump sum that is payable if the policyholder becomes disabled or develops a specified illness. Typically, policyholders' contributions are invested and the life assurance benefits are 'purchased' from that investment fund. The fund's performance has a significant effect on the level of future benefits, although the firm will also take into account other factors, such as changing mortality rates and the possibility of reduced investment returns in the future. For investment related whole of life plans and Inheritance Tax Planning we act as introducers only. The Financial Conduct Authority does not regulate some forms of Inheritance Tax Planning.

What options could I attach to a Life Cover policy?
Guaranteed Rates - This is where by the monthly premium remains the same throughout the policy term Reviewable Rates - This is where the policy is reviewed on a regular basis (usually annually) and the premium is revised based on either the sum assured, the applicant's age or both. Waiver of Premium - If you have a long-term disability (not deemed a 'critical illness' by the policy), after a pre-selected period of time (normally 26 weeks) your policy will stay in force without any further payment of your premiums, as long as you meet the Life Company's specified definition of the incapacity. Renewal Option - Instead of choosing a fixed term for your policy, you can choose to renew it every five or ten years. If you do this, the life office won't require any medical evidence when you renew. This option is particularly useful when you need flexibility about how long cover is to last. Indexation Option - You can choose to have your benefit amount increased yearly in line with the Retail Prices Index (RPI) to account for the effects of inflation. Total and Permanent Disability Benefit - This is an add-on benefit which will pay out if you are diagnosed as being totally and permanently disabled. You can normally choose between three definitions of disability: being unable to work at your normal occupation (NB: this definition is not available for all occupations) being unable to carry out any occupation being unable to carry out some of the activities of everyday life Buyback Option (generally only applies to life cover with critical illness protection) - After a critical illness or permanent disability claim has been paid, your policy would normally be deemed to have run its course. The life buyback option offers you the opportunity, within a year of such a claim, to 'buy back' the same level of life cover as you had before. Please note that this option would not apply if the critical illness in respect of which the claim was made falls within the policy's definition of terminal illness.

How much will it cost me?
The premium you pay will depend on two main groups of factors:

The Cover Provided
As with most things in life, you get what you pay for! Naturally, the more comprehensive the cover, the more you're likely to pay. In addition, if you decide to go with 'extras' on your policy (eg: waiver of premium) this will add to the cost. Whether you have level or decreasing cover will also affect the premium.

You
The insurance company will take into account many factors about you when calculating your premium. The starting points will be your age, and whether or not you're a smoker. These will be taken into account on the original quotation, and along with the cover provided will form the basis of the provider's 'standard rate' (sometimes called 'ordinary rate'). On the application form, you will also be asked as series of questions about your current and past health (including that of your immediate family), your occupation, lifestyle and leisure pursuits. Depending on the responses to these questions and the outcome of any medical examinations and/or tests (if required by the provider), the provider may accept the policy but with an increased premium.

IMPORTANT - You would be surprised at how many claims on life policies are rejected because something was not disclosed by the claimant when the policy was applied for! However tempting it might be to omit something from your application, either to avoid paying a higher premium, or because you think it too "trivial", The mortgage monkey strongly recommends that you disclose such information if in doubt, DON'T leave it out! (If there is information of a very sensitive nature, you do have the option to disclose this in writing directly to the provider, and such information will be treated as confidential.)


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