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Types of Policies and Cover

The various types of policy and policy cover are detailed below

Critical Illness Cover
A critical illness policy, often referred to as a CIC policy, for critical illness cover, can be arranged either on a term basis, or a whole life basis. This is not the same as Terminal Illness Cover, as the illness does not have to be terminal for the policy to pay out.

Cover is usually for a range of specified illnesses and diseases, specified in the policy, often with Permanent Total Disability (PTD) caused by an accident, or by an illness or disease which is not one of the specified diseases listed in the policy. Policies with the wider range of cover are sometimes call Comprehensive policies.

Generally it is a question of premium, with basic cover for specified diseases being available at a lower premium, which increases as the wider covers are added.

A Critical Illness Policy pays out on diagnosis of the illness or disability, which means it may be possible to relieve financial pressure by paying off a mortgage, employing help in the home or garden, making some house alterations, etc or just having a long holiday to recuperate.

It is quite common for these policies to pay out their benefits, and the policyholder to live for many years afterwards.

As well as the choice of ilness and disability cover, there are different options for the occupational basis of the cover, and again this can make a difference to the premuim.

There are three definitions for when the policy will pay out for Permanent Total Disability, depending on what level of work you may still be able to do, The most expensive form of cover is on a Own Occupation basis. This means that if you are unable to carry out your own usual occupation, the policy will pay out, even if you could carry out some work of a less demanding nature.

The second is Any Suited Occupation, which means the policy will pay out if you cannot continue in your own occupation, or any other occupation to which you are suited by ability and training. For example, a surgeon may be unable to carry out theatre work, but may still be able to do consultancy work.

A piano tuner, who had developed hearing difficulties, may be able to continue as an instrument repairer.

The cheapest form of cover is on an Any Occupation basis, which means if you are unable to work at all, at any occupation at all, the policy will pay out.

Decreasing Term Assurance
With a decreasing term assurance policy, the sum assured decreases over the term, usually as liability for a known commitment reduces with time. The most common use of decreasing term cover is in Mortgage Protection cover, for a Capital and Interest Mortgage, where the sum assured reduces as the mortgage is paid off.

Family Income Benefit
This is a rather strange version of term assurance, but it is also one of the cheapest methods of providing protection for a young family, so it is very popular where the amount available for premiums is limited, often because there is a young family!

The family income benefit policy is a decreasing term policy, so it provides cover for a fixed term of years, like other term policies and only pays out on death within the policy term , again just the same as other term policies.

Where this one differs from a normal reducing or decreasing term policy is that the benefits are paid annually, rather than as a lump sum. This means a parent can take the policy out when they have young children, with the term usually until the end of the projected time for full time eduction for the youngest child. The sum assured is the amount which would be required to help with household expenses in the absence of one of the breadwinners.

However, as the years pass, the potential liability of the insurance company reduces and the actuary takes this into account when setting the premiums. For example, for a policy with a fifteen year term for £10,000 a year, the possible liability of the insurance company starts at £150,000 at inception, or start, of the policy, but after ten years, only five years would remain of the policy term in the event of death, so only £50,000 would have to be paid out.

A further benefit to the insurance company, which is again reflected in the premiums, is that the insurance company gets to hang on to the money, earning investment returns, and only paying out the annual amount, for the example the £10,000 referred to above, each year.

Increasing Term Assurance
Not much used, really, the sum assured increases each year during the policy term. It can be useful if you know you have increasing commitments over a period of time, possibility in connection with paying for purchase of a business over a period, as turnover increases, for example.

Level Term Assurance
The level in level term assuramce refers to the fact that the sum assured remains the same, or level, throughout the term of the policy, it does not increase or decrease.

Mortgage Protection Assurance
This is just a decreasing term policy with a fancy name. The sum assured starts off at the amount of the mortgage advance and reduces at a rate which takes into account the capital repaid.

This type of policy is only suitable for capital and interest (repayment) mortgages, where partial capital is being paid off throughout the mortgage term. It must not be used for protection where the mortgage is of the interest only type, such as an ISA (Individual Savings Account) mortgage, as the amount of the mortgage stays the same throughout the mortgage term and is only paid of at the end.

Term Assurance
Term assurance is a form of Life Assurance Policy which provides cover for a number years, the number of years being the Term. So, a ten year term assurance policy provides life assurance cover for the duration of the policy, ten years, and on survival to the end of the policy term, the policy lapses without value and nothing is paid out by the insurance company.

It is not an endowment policy or a whole of life policy, just straight life cover for a specified period of years. This means that life cover can be provided relatively cheaply in this way, as most policyholders will survive to the end of the term and the policy will not pay out. This makes both the policyholder and the insurance company very happy.

Terminal Illness Cover
Some policies include terminal illness cover, sometimes as standard, or as an optional extra. With this cover, in the event of diagnosis of a terminal illness, which is likely to lead to death within a specified time, say six months, the policy will pay out as if death had already occurred.

The cost of providing this extra cover is very small, as all that is happening really is that the insurance company have to pay out the benefits a few months early, so it doesn't cost them much more. It can have an immense benefit on the policyholder, however, as it enables them to put their affairs in order, make gifts as they wish, and perhaps pay for additional services which may make their final months more comfortable.

Whole Life Assurance
Whole life cover, or Whole of Life Assurance, to give it it's proper title, provdes cover for the whole of life, as the name applies. This means that it will always pay out eventually on death, provided the premiums are paid.

The most common use of whole life policies is in estate planning, where a policy is taken out to cover potential liability for Inheritance Tax (IHT). For this purpose the policy is written in trust for the beneficiaries, usually the children. On death, the policy is paid out to the children, outwith the estate for IHT purposes, and they can pay the IHT bill from the policy proceeds, leaving the remainder of the estate intact.

This is particularly useful where the bulk of the estate consists of the family home, which can be kept in the family, where it may otherwise have to be sold to pay the tax bill.