Term Assurance
Term insurance is the cheapest - and simplest - form of life insurance. You insure yourself for a set term - until a loan is paid off, for example. It doesn't contain any investment element - it simply promises to pay out if you die within the term. If you don't die within that time, you receive nothing.
Term policies can either be level or decreasing. A level policy simply means the sum assured remains level throughout the term of the policy. If you die on the first day of the policy, you get exactly the same sum as you would if you died near the end of the policy. A decreasing term assurance policy on the other hand, will pay out more at the beginning of the policy than it would at the end.
The way a term policy pays out can also come in one of two ways. Those that pay out a tax-free lump sum on death and those that pay a tax-free income to the end of the term, known as family income benefit policies. As usual there are pros and cons to both, a lump-sum policy can be more flexible because it allows your family to have a mixture of lump sum and income upon your death. A family income policy on the other hand is often cheaper because the liability is always decreasing for the insurer, for example, if you die in the 18th year of a 20-year policy, the insurers would only have to pay income for two years. It's also easier to work out the level of cover with this type of policy because you simply work out the income you would need to replace.
Some policies have rider benefits, which are extra sorts of cover, added on to the principal life cover. Such benefits include:
- Waiver of premium benefit - the premiums are in effect paid for you in the event of defined incapacity due to illness
- Income protection benefit - a percentage of your income is paid to you if you cannot work at your usual employment
- Unemployment benefit - a variety of income protection benefit
- Critical illness cover - the benefit is paid before death on the diagnosis of a potentially life threatening disease (e.g. cancer). This benefit may replace the death benefit, or it may be paid as well
All these riders cost extra and are only paid subject to meeting tight criteria.
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