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Life Insurance, Critical Illness, and Income Protection Explained

Life insurance, critical illness cover, and income protection policies offer a range of benefits and vary in cost, but which is the best option?

The first thing a homeowner will do is to protect their possessions by purchasing home insurance. The first thing a car owner will do is to protect their car by purchasing car insurance. However, the same people are often reluctant to protect their family and the one thing that allows them to own a home, a car and a big screen television - their income! Read also: What is the Difference Between Term and Whole Life Insurance?

Life Insurance, Critical Illness, and Income Protection Explained

The need to protect one's family, income and mortgage in the event of death or serious illness is often overlooked due to a lack of understanding of how the policies operate with many stating that they are not value for money. This is not the case.

Life Insurance – What is It?

A Life Insurance policy is designed to pay out a cash lump sum in the event of the death of the policyholder during a set period of time. The most common use for a Life Insurance policy is to cover the outstanding balance on a mortgage in the event of death.

The two main types of Life Cover are level term or decreasing term. A level term policy means that the sum assured will remain the same for the duration of the policy, whereas a decreasing term policy reduces inline with the outstanding mortgage balance. This makes a decreasing term policy cheaper as the sum assured is reduced the longer it is kept in force meaning any potential pay-out after the first year will be lower than compared to a level term policy. Read also: How to Get a New Jersey Insurance Agent License Online.

Life Insurance – The Cost

Life Cover is very cheap, and most policies include a terminal illness benefit which will pay out the sum assured if the policyholder is diagnosed with a terminal illness and has less than 12 months to live. Factors that effect the cost of life cover is whether the applicant smokes, participates in hazardous pursuits (such as sky diving or pot holing), and the health of the policyholder.

Although the biggest factor on price is the smoker status of an applicant other significant health factors include the height and weight of the applicant, and whether they suffer or have suffered from any health issues. When taking out a new policy a number of health questions are required to be answered honestly as any non-disclosure may result in an unsuccessful claim.

Critical Illness Cover – How it Works

A Critical Illness policy works in exactly the same way as Life Insurance except that the policy will pay-out a lump sum on the diagnosis of a critical illness as apposed to the death of the policyholder. There is a limited range of conditions covered that can vary from provider to provider. Usually a Critical Illness policy will cover between 25-40 conditions across a range of illnesses.

The policy can be on a level or decreasing term basis, and due to the fact that someone is more likely to suffer a critical illness than die during the term of the policy a Critical Illness plan will be the more expensive option. Additionally, a Critical Illness policy can be combined with a Life Insurance policy with the sum assured being paid at the first event, whether it be death or a critical illness during the policy term. Read also: Commercial Insurance Checklist.

Income Protection – A Regular Income Replacement

Income Protection works in a different way in that it is designed to pay-out a regular monthly income instead of a one-off lump sum. The aim of an Income Protection policy is to replace a proportion of the income lost by the policyholder if they are off work due to accident or sickness. The proportion of income replaced is usually capped at 65% of the policyholders’ monthly income.

The policy will commence after a deferred period, for example 12 weeks, with the longer the deferred period the cheaper the policy. An Income Protection policy will continue to pay-out on a monthly basis until the first of three situations arise. These are that either the policyholder returns to work, retires, or dies. Due to the fact that this is a longer-term policy the cost can vary widely and this largely depends on the deferred period and the occupation of the applicant.

Mortgage Payment Protection

This a cheaper alternative to an Income Protection policy in that it will only cover the policyholders’ monthly mortgage cost and only for a period of 12-24 months if the policyholder is unable to work due to accident and sickness. The deferred period is shorter, with the normal deferred period set at 30 days. An additional Unemployment benefit can be added to the policy to cove this eventuality over the same term.


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