Life assurance: policy types

Term life assurance is the simplest form of policy, offering basic cover for a set number of years, usually at low cost. A term policy requires a regular premium payment and pays out a lump sum on the policyholder's death. If the policy expires and the holder is still alive, no payment is made; the policy pays out only if you expire before it does. The cost of the assurance premiums will vary from person to person depending on factors such as age, health and occupation, but for all policies it is crucial to ensure you keep up the monthly premium payments to keep cover in place. Term assurance policies may also offer the option to pay an extra premium and receive a payout in the event the policyholder is diagnosed with a critical or terminal illness. Critical illness cover can include debilitating but not necessarily fatal conditions such as heart attack or stroke, cancer, multiple sclerosis, loss of limbs, etc., and the cover pays a lump sum on diagnosis - not for treatment of the condition, as you would expect with a health insurance policy. As with any coverage, it is important to be sure exactly which conditions the policy covers, and which it doesn't. A policy will be very specific as to the illnesses it will pay out for; critical illness policies can also range from basic coverage, which will include just the main critical illnesses such as cancer, to comprehensive policies that cover a more extensive range of conditions. Full disclosure of any and all existing medical conditions and history is vital when arranging critical illness cover. Failure to disclose could result in denial of payment when an illness is diagnosed - just when that payment is needed most. Policyholders wishing to provide for their families in the event of their death can choose Level Term assurance, which pays a lump sum if the holder dies during the term of the policy. The payout amount is guaranteed and remains the same throughout the policy; you only need to choose how much you wish the amount to be, and the length of the policy term. There is no payout, however, should the policyholder outlive the term of the policy. Decreasing Term assurance sees the amount to be paid out decreasing over the term of the policy. Most often used to cover mortgages, this type of term life assurance has the payout sum reducing over time just as the amount owing on the mortgage reduces. Some mortgage providers will not release mortgage funds without the debtor securing some form of life assurance, guaranteeing repayment should the worst happen. Whole-of-life assurance removes some of the guesswork from life assurance by guaranteeing a payout of a lump sum when the policyholder dies, at whatever time that may be. As long as the premiums are maintained, the cover is assured. However, because a payout is virtually guaranteed, this assurance is generally more expensive than basic term assurance and is generally more likely to be used in Estate Planning as a tool to meet Inheritance Tax liabilities. Endowment life assurance policies are essentially savings schemes that have life assurance attached; they are most often carried with mortgages and pay out any accumulated returns at the end of the policy term, or if the policyholder dies before the end of term, a payout sum plus any returns so far. Generally endowments are taken out with decreasing term assurance, where the payout sum decreases throughout the term of the policy to cover the remaining mortgage debt, but the endowment investment is hoped to make up the difference and even perhaps surpass it. However, this happy outcome requires the cooperation of the investment markets - the performance of which is not, of course, guaranteed. With Convertible Term assurance, you may convert a term policy to whole-of-life or endowment assurance at the end of the term of the policy, without necessarily having to provide new medical details. Family income benefit provides a slightly different payout; the benefit upon your death is provided to your family in regular payments rather than in a lump sum, giving them a regular income over a selected period of time. The term is chosen at the outset of the policy, and this type of policy would usually be taken to replace a lost salary or to provide an income for a particular purpose, such as children's education expenses. With Family Income Benefit, you decide the term ahead of time, perhaps to match your expected income-earning years. So if you die with five years to go on the term of the policy, it pays out the benefit to your dependent for the next five years. If you die with only six months to go to the end of the term, your family will only receive six months' worth of benefit.