Deciding on life coverPosted on: 11 June 2013 by Chris Rowe
Chris Rowe explains the different types of life cover and what to consider before purchasing.
Life insurance is not the easiest subject to discuss - not many of us like to think about the fact that at some point, we're not going to be alive anymore. But, along with taxes, death is one of life's very few certainties, so we'd like to offer you a few thoughts on life insurance and critical illness cover.
These two types of cover are often lumped together, but there are some really crucial differences that it pays, quite literally, to be aware of.
First of all, let's look at the costs. With life insurance, it's fairly straightforward - your insurance pays out to your beneficiaries upon your death. You pay a premium, usually monthly, which will vary according to how much you want to be covered for. As a general rule, the bigger you want any payment to be, the bigger your premiums will be. This is also linked to your age and the length of policy you require. The older you are at outset / the longer you wish to run the plan, the higher the cost. You can also choose how your beneficiaries will be paid; either with a lump sum or by annual payments over a set term.
Financial safety net
Life insurance is usually recommended to you if you have dependants, such as children particularly if you have a financial commitment such as a mortgage. It's not cover you will ever benefit from in monetary terms, but it can provide you with the security of knowing that your family have some kind of financial safety net should the worst happen to you. That being said, life insurance isn't a 'must' for everyone; it probably isn't a high priority for you if you do not have any financial dependants. In this situation, consider Income Protection or Permanent Health Insurance.
Critical illness cover
So if life insurance can be thought of as being for the benefit of the people closest to you, what is there to provide a safety net for yourself? The choice for many people is critical illness cover. One of the most applicable pieces of wisdom about critical illness cover is the old adage that you get what you pay for. We'll caveat that, however, by saying that the most expensive cover does not always mean the best cover. When you're considering critical illness cover, there is a lot to bear in mind and it's a financial product that we would strongly recommend you take independent advice about before purchasing it.
Here's why: critical illness cover is not as straightforward as it might seem, particularly when it comes to certain illness definitions. Life insurance doesn't have much variation as we mentioned above; critical illness cover, in contrast, has various levels of cover. There has been some controversy in recent years involving critical illness cover providers and what constitutes a heart attack.
Different levels of cover
There are also significant differences between providers when it comes to partial payouts. These are when your provider will pay a certain amount towards treatment for certain illnesses and situations, such as accidental hospitalisation. Some providers will not pay out anything, others will pay a percentage of the cost, up to a maximum amount (1). This is an area where all good independent financial advisers will be able to distinguish between the different levels of cover and provider and guide you towards the best one for you and your requirements.
Your independent adviser will also make you aware of any restrictions there might be on claiming and will make sure that you are fully aware of all the terms and conditions of your cover, including a provider's definition of certain illnesses, before you take it out.
If you already have critical illness cover, or life insurance, have you considered reviewing it, or has it been one of those things you took out and promptly forgot about? If you do have a policy, have it reviewed to make sure you have the cover you need at a fair price.
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