Life Insurance

What it covers

Term - or 'protection-only' This type of insurance pays out if you die within a set period of time - the 'term'. If you survive the term it pays out nothing. It can be arranged on the lives of two people - for example, a married couple - to pay out when one or both of you has died.

Investment-type insurance - such as endowment and whole life policies - accumulates a surrender value which may be paid out on death, when the policy matures or when it is cashed in. Though these policies include a protection element, their main use is for investment purposes and they are covered in Sections 6 to 8, not here.

Types of term insurance policy

Lump sum policies This is the basic term insurance. It pays out a set lump sum if you die within the term.

Family income benefit (FIB) policies Basic FIB policies pay out a fixed monthly income if you die within the term. The income is paid from the time you die until the end of the term, and is tart-free. Because the amount the policy must pay out falls as the term left to run falls, these policies are cheaper than equivalent lump sum policies and are a particularly good deal for people with young families.

Whether you choose a lump sum or an FIB policy there are variations, which are described below. Often, you can combine the different elements to produce, say, a 'renewable increasing term insurance'.

Increasing term insurance The amount of cover is automatically increased at regular intervals either by a set amount or in line with inflation. Premiums are higher than for a level cover policy but often are the same throughout the whole term. Most people should consider this type of policy to lessen the impact of inflation on the level of cover.

Increasable term insurance At set dates throughout the term (such as the policy anniversary) you choose whether or not to increase the cover. If you increase the cover, your premium rises but there's no weighting for any deterioration in your health. This can be a useful option where, say, you expect to want to increase your cover as you have more children.

Decreasing term insurance The amount of cover reduces during the term. Often used as a 'mortgage protection policy' to cover a repayment mortgage and pay off the amount of the outstanding loan if you die within the mortgage term. Can also be used to protect other loans.

Renewable term insurance At the end of the term you have the option to take out further term insurance. The premiums for the new policy are not weighted for any deterioration in your health. This can be a useful option.

Convertible term insurance You have the option to convert the policy into another kind of life insurance. Premiums for the new type of policy might take account of any change in health.

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Car Insurance Case History

Mr N had a comprehensive policy covering 'any driver' so he wasn't particularly concerned when his brother-in-law borrowed his car and had an accident. But he soon got worried when his insurer refused to pay the £450 claim for damage to his car.

Mr N was appalled to discover that his brother-in-law wasn't covered under the `any driver' policy because he had been convicted of a drink-driving offence two years previously, which meant that he was driving uninsured when the accident happened. So Mr N had to pay for the repairs. In addition, three pedestrians were injured in the accident... see: Car Insurance Case History

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