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What is a Life Insurance & Income Protection Policy?
A Combined Life Insurance & Income Protection policy provides a lump-sum payment for family members in the event of the policyholder's death during the term of the policy, as well as monthly payments if the policyholder cannot work due to long-term sickness or disability, potentially up to your retirement age. It is also possible to protect against redundancy for up to 12 months.
The policy is primarily designed to help protect immediate family members and possibly other dependents from financial hardship by providing the means to pay off the mortgage on the family home and/or by providing income to the surviving spouse to maintain their standard of living.
What are the policy options?
If the policy is to be used solely to cover a repayment mortgage, then a Decreasing Term Life Insurance product is usually the cheapest option, as the amount of money the policyholder has been insured for decreases in line with the value of the outstanding mortgage balance, and the premiums reflect this
Conversely, a Level Term Life Insurance product is usually the best choice for an interest-only mortgage, where the value of the outstanding mortgage balance remains constant during the term of the policy.
Level Term Life Insurance is also the preferred choice for the other main use for life insurance, namely providing family protection until the children leave home, or until the surviving spouse has retired. It is often advisable to consider an index-linked policy in this instance to counteract the effects of inflation on the value calculated to provide sufficient protection for the family.
How much Cover is required?
The amount of cover required is always going to depend on an individual's circumstances. For both elements of the policy, you need to work out the financial impact to your family in the event of you not being able to work, or your death, and how much money they would need monthly to survive.
For Life Insurance, if you want to do more than simply pay off the mortgage, then as a general rule of thumb, the best starting point is to multiply your annual net income by 20 and then add the value of your outstanding mortgage or other loans. If you cannot afford to pay for that amount of cover, you should ideally then set a budget and then find out how much life insurance your budget will buy.
For the Income Protection element of the policy, you need to work out your monthly outgoings.
Most leading life insurance policies include Terminal Illness Insurance at no extra cost. In the event that the policyholder is diagnosed with a terminal illness (defined as where life expectancy is less than 12 months), then the insurer will agree to pay the amount of money insured on diagnosis rather than death. However, this benefit is not generally available during the last 18 months of the life insurance policy.
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