Here at Citywide Financial we often get asked to explain the different types of Life Assurance (Insurance) available on the Irish market. In our blog below Brian Courtney QFA gives a brief summary of each.
Whole-of-life Assurance is a type of life Assurance which ensures that when you die your loved ones will receive a lump sum payout from your insurer. It does not matter when or where the death occurs. Whole-of-life policies are guaranteed to pay out at some point in the future. As a result this is a more expensive form of life cover. If you are looking for less expensive life cover, you may be better off considering term assurance.
Term assurance, or term life insurance guarantees your family a payment if the person insured dies during the time period specified in the policy. Frequently, people take out life assurance because they want their dependants to be able, for example, to cover housing costs if the worst situation were to occur.
But given that the average mortgage is paid off after 25 years, it may not be necessary to extend life cover beyond this.
Likewise, policyholders may want to be covered only while their children are living at home or in full-time education.
Restricting the life assurance (Insurance) policy term in this way means that premiums will be lower than with whole-of-life cover.
This type of cover can also be called level-term assurance or insurance which expires after a predetermined number of years ( the ‘term’). You pay regular premiums and if you die over the course of the term, the settlement is then paid to your dependents.
Mortgage Protection / Decreasing-term insurance
An option for those buying term life assurance is to have the potential payout decrease year after year.
This is usually to reflect the fact that mortgage debts are likely to be falling as more is paid off.
For example, you could take out a 25-year life insurance policy to cover €200,000 ..the same amount as you have borrowed on a 25-year mortgage – in the event of your death.
However, after 15 years, for example, the mortgage is likely to have diminished considerably so you could find yourself “over-insured” and paying more than is required in premiums as a result
Decreasing-term - assurance deals with this issue and, as you would expect, premiums will be lower than with normal term assurance.
Increasing-Term Assurance (Insurance)
An increasing term life policy takes changes in inflation into account meaning that your payout amount rises alongside the inflation rate.
With an index-linked policy you can choose to link your payout directly to an inflation measure.
Such as the Retail Prices Index (RPI) or Consumer Prices Index (CPI), or you can simply arrange for the cover to increase by a fixed percentage every year.
If the cover is due to rise every year, your premiums will be higher than for level-term and decreasing-term insurance.
Renewable term insurance
This is a policy that will allow you to renew or extend your existing term policy for an additional term regardless of your current health.
Based on your age, the premiums may increase at this point.
Joint life insurance
For couples, this policy covers two people but pays only once.
This can be cheaper than paying the premiums on two separate policies, but bear in mind that joint policies only pay out on the first death – after that the cover ends.
If you had two separate policies, the second policy would remain valid even after a claim had been made on the first.
Death-in-service is a form of benefit that’s provided by an employer.
This doesn’t necessarily mean the death has to be at the workplace or actively engaged in any work related activity. It means that if you die and are still on the company pay roll at the time, the payout will be made.
Members of company pension schemes may also be eligible for payments from the pension if they die before they retire.
While being cognisant of these benefits when you choose life assurance, it is worth noting that when taking everything into account, that death-in-service payments are equal to three or four years’ salary and may not provide all the cover you and your family need. Also it is important to note that this cover may desist as soon as you leave the company.