Life Assurance and Critical Illness Cover

Life assurance takes two main forms - Term Assurance and Whole of Life Assurance:

Term Assurance

There are several types of term assurance:

Level term assurance - provides protection on death within a specified period only The contract expires at the end of the term and there is no cash in value at any time.

Decreasing term assurance - again a term assurance with a decreasing sum assured, usually on a fixed scale year by year. Often used to protect repayment mortgage loans.

Increasing term assurance - a term assurance with a sum assured increasing at a predetermined rate, e.g 5% per year. Premiums may also increase at a predetermined rate.

Convertible term assurance - a term assurance with a built in option to convert the plan to an endowment or whole of life plan during the current policy term without the need for further medical evidence. Good for those whose plans are not finalised, or whose budget cannot stretch to whole of life assurance

Family Income Benefit - this type of policy provides a regular income on death of the life assured for the remainder of the term of the policy. Regular income can be commuted to a lump sum. Very useful competitively priced product for those with dependents. Although referred to as income, the payments are not taxable.

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Whole of Life Assurance

This type of plan will pay out the sum assured on death at any time. Plans can be set up on different levels and the level of cover is set for the first 10 years of the plan, based on an assumed growth rate in the investment fund to which the contract is linked. After 10 years the fund is reviewed to see actual growth rates and this determines whether the value of the units allocated to the policy at that time will be enough to maintain the sum assured. If there is not then the premiums will increase. Regular reviews take place throughout life.

The levels of cover are:

Maximum - provides the level of cover which can be sustained through the initial review period, but with little or nothing for investment since the whole premium is needed to provide the risk benefits. If this level of cover is taken it is likely the premiums will increase on first review, or the sum assured reduced.

Balanced Cover - is aimed to provide the same level of cover throughout life, with the premiums variation being at a minimum (subject to investment performance).

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Critical Illness Cover

This type of contract will pay out a sum assured on diagnosis of a specified range of illness. Most contracts include conditions such as cancer, stroke, and heart attack.

The plan can be for a specific period, or taken on a whole of life basis. It can also be a free standing contract or combined with a life policy to provide a 'first event' plan, i.e. the sum assured payable on death or earlier diagnosis of critical illness.

A free standing contract is usually payable only if the life assured survives the critical illness for a fixed number of days (usually 14 or 28), so for example if an individual has a massive heart attack and dies on day 8, then this may not qualify for payment.

There are additional benefits available with some plans, for example buy back cover, where a provider who has paid a claim for critical illness will offer to reinsure the policyholder for a lesser sum assured after a qualifying period, at a time when they are practically non-insurable elsewhere.

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