Life Insurance, Mortgage Protection, Serious Illness & Income Protection
The Various Types of Life Insurance Policies Explained
Hi my name is Niamh and I’m a managing director of AOR Insurances.
You may have heard of us – we’re based in Cavan and specialise in arranging tailored life insurance cover for people like you and your family. We’d love to help and are unbiased when it comes to getting you the best cover.
You may be applying for a mortgage and you may have been offered a life cover policy to purchase from your bank. Don’t do that, really, if you decide to switch your mortgage to another bank your original bank could cancel your policy and you are not guaranteed to get a new one from another provider.
Use a broker like us or whatever broker you prefer, so that you don’t need to switch providers in that situation.
You mightn’t know much about the different types of cover available in Ireland so this article explains the main types of cover and why you would need each.
If you want some down-to-earth advice, just call us on the number above and we’ll have a chat.
We are independent advisors which means that we know the strengths and weaknesses of all the Irish life insurance providers, namely
- Zurich Life
- New Ireland
- Friends First
- Royal London
- Irish Life
So, what is Life Insurance?
In a nutshell, it’s used as financial protection for when you die or are unable to take care of your loved ones.
It is a way of creating a safety net for the people who depend on you. This can be insurance on the primary bread-winner of the house, but it could also be insurance cover for the stay-at-home partner who does the cooking, the cleaning, the childcare, the lawn, garden care and all the other small things that need to be done in a household. If something happens to the partner that does all those small chores and takes care of the kids, then the partner who earns the salary in the house would need to hire someone to take over those tasks or would have to find some way to fit them into his or her already busy schedule.
Some policies, however, have provisions for illness or injury. They can be used as collateral when taking out a loan, or you can borrow money directly from them. If you have the correct type of life insurance, it might even pay out periodic dividends. Such policies are typically more expensive than just plain cover, however, and you will need to balance out their cost against your current circumstances.
Life insurance comes in many forms. If you have a large loan such as a mortgage or a vehicle loan, your lending financial institution might insist that you have a policy that will finish paying off the loan should you pass. This would mean that the asset you are purchasing would be paid for by the insurance agency, and the house or vehicle would then become part of your estate.
The next most common types are either term life or whole life insurance, which is usually paid out to your beneficiaries upon your death. This can be difficult to obtain if you wait until you are over the age of fifty or are in poor health. You can still get it, but because there is an increased risk, the premiums will be more expensive or the total policy cover will be less.
That is followed up by insurance that does not require a medical exam for people who are over the age of fifty. Such policies are typically small but can be sufficient to cover funeral expenses or outstanding debts.
The final type is income protection – a term that is essentially self-explanatory. However, it should be understood that this usually refers to loss of income due to injury or illness, not because you have been let go from your employment.
Understanding these terms and how the policies are supposed to work can help you decide what kind and how much life insurance you might need. If you are uncertain about this, consult an independent financial advisor like AOR Insurances. The advisor will have no interest in a particular insurance company and will be working for you – not an insurance agency.
Mortgage Protection Insurance
Mortgage protection is a type of insurance that is often required by banks and mortgage lenders. People who take out such loans are required to carry policies that will cover the amount of the mortgage.
What does mortgage protection do?
In the event of the mortgage holder’s death, a mortgage protection policy will finish paying the amount owed on the property. If the property is owned jointly, and only one person dies, the policy will often still pay for the home, leaving the home or other property owned by the survivor. Some mortgage protection policies have contingency plans built in that are similar to income protection plans.
Some types of mortgage protection will take care of your monthly mortgage payments for a specified time if you have lost your job, or if you become too ill to work. While there are conditions that surround these policies, they are often put in place because the mortgage company loses money when you are unable to make your payments on time.
Most mortgages are set up to be paid over a thirty-year time span. Even though you might be perfectly healthy when you take out the loan to buy your home or business, many changes can take place during that amount of time. An insurance policy that will take care of your payments can be of great value to you and to your family.
Because mortgages are set up for a specified amount of time, many mortgage protection plans are essentially term life insurance policies. Understanding how a term life policy works can be to your advantage when selecting a mortgage protection plan.
Life Insurance / Term Life Assurance
Term life or simple term life assurance is the sort of insurance taken out by most young parents or people who are starting out in their careers or business. It has a set premium rate and is often in force for a specific amount of time.
What does life insurance do?
It provides a financial cushion for your family in the event of your death, either from an accident or from natural causes. Some policies have clauses that exclude cover for certain types of high-risk activities, such as skydiving or bungee jumping. A term policy is insurance that is in force for a specified amount of time, such as for the duration of a school year or for a sufficient amount of time for a new baby to become an independent adult, or for long enough for a mortgage or car loan to be paid off.
Because the time for the loan is finite, the premiums are often less expensive than the more complex cover known as Whole Life.
Term life is intended to pay the bills for your family in the event of your premature demise. You can select the amount of time for which you would be insured, usually ten, twenty or thirty years. For example, if you had a child that is aged two years, you might want cover until that child would graduate from college at around age twenty-five. Thirty years of cover would see him or her graduated and probably set up in a career before your demise. Should you become terminally ill or involved in a fatal accident the policy would either pay out a lump sum that could be invested to provide an income for your heirs or it could be paid to them in monthly payments until a specified time, such as when they would reach their majority. Or you might select ten years until a vehicle has been paid off or you have pulled your family out of debt.
Balancing the amount of insurance that might be needed to care for a young family against immediate needs such as food, clothing, and a roof over their heads can be a tricky bit of business. As one reviewer put it, life insurance is intended to buy you peace of mind, not put you into an early grave from overwork so that your family can live in luxury after your death. You want enough insurance to take care of them, but not so much that the premiums are a burden.
Guaranteed Fixed Price Whole of Life Cover
Whole life is perhaps the simplest of the “permanent” life insurance types of cover. It has three main components:
- The premium will always remain the same
- Death benefits are guaranteed to your heirs
A portion of your premiums are treated as tax-deferred investments, and the value of the policy will grow at a guaranteed rate.
Unlike term life, unless you drop the policy, it will remain in force throughout your life. The premiums for a guaranteed fixed price policy will not change – but the value of the policy is affected by the amount of the premium paid. Like term life, you will need to find a balance between expected benefits, your current needs, and the cost of the policy.
What does whole of life cover do?
Whole of life does a lot of things. Like term life, it will pay death benefits to your heirs or to your estate. It might be paid in a lump sum, but more often, it is paid in instalments of an amount sufficient to take care of monthly expenses.
You can borrow against your whole life insurance policy. However, if the amount borrowed is not paid back, plus interest, the amount borrowed is counted against the value of the policy. If you should meet your end before the loan is repaid, it could significantly reduce the payout from the policy. Therefore, think twice before using your whole life policy as a sort of banking lender.
Some, but not all, whole life policies will pay dividends after a time. The dividends might be paid to you, or you can choose to feed them back into the policy to help increase its investment value. You can even withdraw the funds from the policy early – but this is not advised, especially if your policy is paid with pre-tax money. Should you withdraw money from the fund before it matures, that money is immediately taxable. This means that even if you are withdrawing it for a legitimate expense, such as catastrophic damage to your home, or an emergency replacement vehicle, you will need to withdraw some extra to take care of the taxes.
Whole life can also be used to pay the estate taxes on your property so that your heirs will not be forced to sell all or part of their inheritance to pay the tax man. Under that same general heading, you can use a whole life policy to set up a trust fund for a child or other dependent who has not reached majority or is not able to care for him or herself.
There are other types of “permanent” insurance policies. These include variable life insurance, universal life, variable universal life insurance and survivorship life insurance. Of these, whole life is the simplest to understand and to explain. The premiums on permanent insurance policies can also be variable, so read those policies carefully. Not all policies have fixed premiums.
Specified Illness Cover
Specified illness or serious or critical illness cover is a component part of an already existing insurance policy. It allows you to receive a specified lump sum upon being diagnosed with an incurable and terminal condition, such as malignant cancer. Specified or critical illness cover can be taken out as a standalone plan, aside from your life insurance policy, or can be incorporated as a part of a term life or whole life policy.
What does specified illness cover do?
If your general practitioner gives you a diagnosis of having a serious or terminal illness that is listed among those covered by your life insurance policy, your company will pay to you a lump sum listed in your contract as being the amount that will be paid for that illness.
Critical illness cover is a little bit tricky. If, during your application for funds, it’s discovered that there is any medical condition that you have not disclosed to your insurance provider, then the company is within their rights not to payout the funds for your condition – even if the condition is unrelated to the undisclosed condition.
Payouts are given only for the conditions that are listed in your policy. Even if a diagnosis reveals something that will affect your lifestyle permanently, if it is not listed as being covered on the policy there will not be any money forthcoming.
Specified serious or critical life insurance is one of those areas where full disclosure and honesty really are your best policy. It is better to be refused up front than to pay out many years’ worth of premiums only to be denied assistance when you need it.
Over 50’s No Medical Life Cover
Over 50’s no medical life cover is one of those terms that is best understood when pulled apart into its component parts. “Over 50”, of course, means that you have passed your 50th birthday. “No medical” means that you do not need a medical examination to get a policy. “Life cover” refers to life insurance cover. With that understood, we can move on to talking about it.
What does no medical life cover do?
No Medical examination life insurance can provide a modest amount of life insurance cover, even if you are past the optimum age, and might even have some adverse medical conditions. Its best use is for things like meeting outstanding bills, burial expenses, and perhaps even a small inheritance for your family.
No medical exam life insurance policies can come both in renewable term life insurance policies and as whole life insurance policies. The whole life policies are then locked in at the premium you select when you sign up for your policy.
Once established, such policies work in much the same way as regular life insurance policies – but there are some things of which you should be aware:
Not all no medical exam insurance policies are created equal – be sure you are getting a policy that is worth the money you will be paying into it.
Some policies are more expensive than regular life insurance
Beware of policies that are essentially accidental injury or death policies. They will not give you cover if you become ill or die of a disease.
With that said, as a general rule of thumb, some insurance is better than no insurance. If you will have difficulty getting a regular life insurance policy and you have obligations that could outlive you, then, by all means, take out as much life insurance as you can afford. Be sure to shop around to find the best policy that you can afford. If your means are limited, you want to get the best value possible for your money.
A no medical exam policy is easier to get while you are young and healthy. Sometimes parents will even take out a policy for a baby as a way of getting their child a head start on life. With such a policy in place, it can sometimes accrue value that a young man or young woman can use as collateral for loans, or even gain a cash income that could be useful for college or for financial stability during a business start-up.
Most financial advisors, however, will warn parents that it is usually more cost-effective to create a savings account for their child and to contribute to it regularly. Such accounts are often given tax-deferment status until such time as the account matures or the money from the account is withdrawn.
Once you are over fifty, the value of “no medical” policies might be smaller and there might be other restrictions incorporated into the plan. As always, read the plan carefully. If you don’t understand the plan, there is a good chance you don’t want to buy it.
Income Protection Insurance
Income insurance or income protection insurance is an insurance that will pay a portion of your normal income if you are ill and unfit to work, if you are employed or if you are self-employed. You are able to insure most or not all of your income.
What does income protection do?
Income protection insurance will pay to you a monthly sum if you are ill or injured, and therefore unable to carry out your normal activities. For example, if you are insured with Irish Life, it will continue until you are age 65, or until you return to work. If you are eligible for any other benefit plans or for state compensation, those amounts will be subtracted from your payout sum.
Specific conditions and benefits will vary according to the insurance policy to which you subscribe. With that said, insurance policies tend to be markedly similar. Aviva, for example, gives an extensive, exceptionally clear explanation of their version of income protection or disability insurance. Other insurers probably have similar plans in place.
Aviva’s explanation is as follows:
If you lose your job or become redundant, your income loss is not covered. This is an important point.
Your policy must be paid up and in good standing at the time of your application for assistance.
Your policy payments will affect any income-tested benefits you might receive, such as government assistance. This is something to keep in mind.
Your insurance cover is for loss of income due to illness or injury. Many policies include payments made for nights spent in hospital.
You will not be asked to make premium payments while you are receiving benefits.
If you return to work at a reduced income because of limited abilities resulting from the injury or illness, you can continue to receive a reduced amount from the insurance policy.
There will be a waiting period after the injury or illness – which must be verified by a doctor. When insured through Aviva, you can select the waiting period. The longer the waiting period, the lower your premiums.
Also, if you are receiving other compensation that might be affected by your insurance, a long waiting period could be to your advantage. However, it could also be a disadvantage.
The Aviva website makes one further suggestion: meet with a financial advisor before deciding on the policy that will be best for you. An outside advisor will be impartial and will be able to advise you on the best sort of income-loss insurance policy for you.
In fact, that is excellent advice no matter what sort of life or other insurance you are purchasing. A financial advisor will be primarily concerned with helping you make the most of your income. You work hard for your money, why not make it work hard for you? Insurance policies of all sorts are complex.
An advisor will help you wade through the policy language, and assist you with finding that balance between the demands of your day-to-day expenses and the cost of life insurance.
AOR – We Are Unbiased Life Assurance Experts
Whether you are looking for Mortgage Protection, Level or Convertible term cover, Whole of Life Assurance, Over 50’s Cover, Income Protection, Serious Illness or more tailored protection products we have a range of policies available.
As an independent insurance broker AOR Insurances (Cavan) Ltd. will work with a number of different insurers to get the best cover for you.
At AOR Insurance we make life insurance more affordable, flexible and accessible for our customers.
We know this is serious business where it pays to be informed, that’s why we will search and advise on the best cover to suit you and your budget.
Call us by clicking the number above, or drop us a message using the form below to get started protecting yourself and your loved ones.