Life Insurance Guide

Introduction

But what happens if disaster strikes? Can you or your family carry on paying the mortgage if the main breadwinner dies, you lose your job, are seriously injured or become critically ill? If such a situation happened a decision to take out life insurance or mortgage protection could be the smartest move you ever made.

Once you have decided that you need life insurance or mortgage protection the next stage is to choose the right policy, which can prepare you for every eventuality, such as serious illness. The array of choice on offer can be mind-boggling but if chosen correctly can offer vital protection for your family as well as peace of mind should disaster strike.

This useful guide will help cut through the jargon and help you choose the right type of life insurance or mortgage protection to fit in with your individual needs, lifestyle and attitude to risk. This guide will also look at the types of life insurance and mortgage protection on offer, some general tips on buying life insurance and mortgage protection, as well as what to do and who to contact should problems arise.

Types of Life Insurance

There are broadly speaking two types of life insurance or life assurance as it is often known, policies that pay out in the event of death, and mortgage protection policies that deal with other scenarios such as unemployment and illness.

Life Insurance

This is the main area of mortgage protection and sometimes called life assurance, whereby an insurer pledges to pay out a sum of money to your beneficiaries when you die.

• Level term life insurance which runs for the length of your mortgage term and pays out if you die
• Decreasing term life insurance which decreases as your mortgage debt falls and is popular among those with repayment mortgages
• Increasing term life insurance which increases each year and is for those concerned about the effects of inflation
• Whole of life insurance policy which pays out following a death and runs beyond the length of a mortgage term

Mortgage Protection

The insurance industry now offers a raft of products for every eventuality, whether it be unemployment or injury. These can either guarantee the remaining mortgage is paid off or that you and your family receive a regular income.

• Mortgage payment protection which guarantees mortgage payments are met
• Income protection which guarantees a household income, which can be the mortgage repayments or more
• Critical illness cover whereby an insurer will pay out a lump sum if a disease or illness from a set list is contracted

General Tips on Buying Life Insurance

1. Ask Yourself Key Questions

These should include: What is your attitude to risk and how well protected do you want to be and from what situation? Making sure you know what you want to be protected from helps select the right policy. Is unemployment a fear? What happens to your home or your mortgage repayments if you die? Have you any children?

It is worth considering that unemployment rather than death is the highest risk. You are seven and half times more likely to lose your job than die between the ages 25 and 44.

2. Seek Advice

The most popular way is to approach an independent financial adviser (IFA) who will help you select the right type of life cover, whether it be mortgage protection, life insurance or income protection. An IFA will also help you find the best product, with quotes for life insurance likely to be wildly different.

3. Shop Around

For those who have a good idea of the type of cover they need, approaching providers direct can help find the right product at the right price, rather than hiring an independent financial adviser (IFA). The Association of British Insurers advises those considering buying life cover, mortgage protection or life insurance to also consider the quality of the product on offer, as well as the price. For example one firm's critical illness cover may extend to include around 35 illnesses and diseases. Even at an extra cost this could be more suitable for some customers.

4. Be Honest

Each year around 11%-13% of mortgage payment protection claims are not paid out, with a main factor being non-disclosure of information. The Association of British Insurers among others advises all customers to answer every question on their application forms truthfully and as fully as possible.

Do I Need Life Insurance?

No one likes to think about worst case scenarios such as losing one's job, becoming seriously ill or dying, but latest Government statistics show that such disasters can befall people at any age. Recent mortality and health figures provide sombre reading for those with a mortgage.

• Mortality rates: during the course of your mortgage you are six times more likely to be killed by lightning than win the national lottery
• Redundancy: each year one in 200 people is made redundant
• Serious illness: mortgage borrowers are more likely to be diagnosed with cancer or have a stroke than ever get a hole in one at golf

Although such disasters are rare, the unexpected can happen, but too many people still enter into a mortgage arrangement without any form of mortgage protection or life insurance. According to research by the Centre for Economics and Business Research single women are among the least likely to fear the unexpected and are ignoring a raft of long term financial products, including mortgage protection and life insurance.

If you decide the risk of not protecting yourself or your family is too great, you are not alone. According to the Association of British Insurers around 2.5 million new payment protection and life insurance policies are taken out each year, with those related to the term of a mortgage by far the biggest proportion.

Term Life Insurance

Also known as term assurance, term insurance is the most common and often least expensive form of mortgage protection or life insurance cover. The insurer will pay out a lump sum, or pay off the remaining mortgage should the policy holder die. The two main forms of term insurance are level term insurance and decreasing term life insurance. Having this type of life insurance guarantees your beneficiaries have some form of financial stability, either by not having the burden of mortgage repayments or a lump sum, which can be used to pay off the remaining mortgage.

Decreasing Term Life Insurance

Decreasing term life insurance, or decreasing term assurance as it is sometimes known, is a popular choice of life insurance among those with a repayment mortgage. This is cheaper than level term assurance as the amount paid out reduces each year as your remaining mortgage decreases. This means that in the event of the policy holder dying at the end of the term of the mortgage no money will be paid out. It is therefore not a sensible option for those looking to invest their money as there is no maturity on the sum paid out.

Choosing a decreasing term life insurance however can offer peace of mind that your beneficiaries will not be faced with the burden of mortgage repayments or risk losing their inheritance.

Level Term Life Insurance

Level term life insurance, or level term assurance, is a life cover product that offers more money to the policy holder's beneficiaries. Money is paid out in the event of the policy holder's death but as a set lump sum that does not decrease as the mortgage repayments reduce. This means that your beneficiaries benefit not only from being free of the burden of mortgage repayments but will also receive extra money.

This is a more expensive option than decreasing term life insurance, to take into account the extra money beneficiaries receive. However as with decreasing term life insurance the money is only paid out during the term of the mortgage and in the event of the policy holder's death. It is therefore not a sensible option for those looking to purchase a life insurance or mortgage protection policy as an investment.

Increasing Term Life Insurance

Worried about rising inflation? If so increasing term life insurance could be the policy for you. As with decreasing term life insurance and level term life insurance the money is only paid out in the event of the policyholder's death. However the key difference is that each year the potential sum paid out increases by a small amount. The increase in this form of term life insurance can either be by a certain amount each year or a percentage of the mortgage. This is a more expensive option than either decreasing term life insurance or level term life insurance and often insurers ask for further evidence of good health before offering this type of life insurance.

Whole of Life Investment

A whole of life insurance policy is for those looking for a policy as an investment rather than merely a way of managing risk. This type of life insurance policy pays out when the policy holder dies, but crucially is not linked to the term of the mortgage. This means there will always be a payout once proof of death has been received.

Advantages

• A whole of life investment offers peace of mind knowing not only that the remaining mortgage will be paid off in the event of your death but also that your beneficiaries will be looked after long after this period
• A whole of life investment policy written in trust to beneficiaries of your estate is a useful way to avoid inheritance tax
• Those with term life insurance can switch to a whole of life investment policy if they take out a convertible term life insurance policy. This gives the policy holder the option to switch at any time to a whole life policy. As a result premiums for a convertible term life insurance policy will be higher

Disadvantages

Because the whole of life investment policy lasts beyond the term of a mortgage, premiums can be more expensive. Therefore for most people looking to secure the well-being of their beneficiaries in terms of only meeting mortgage repayment commitments, this type of policy is usually not necessary.

Guaranteed Insurability Option (GIO)

The Guaranteed Insurability Option is a useful rider that is offered with most term insurance policies. Having guaranteed insurability option (GIO) means that additional life cover can be bought without having to take out a new policy and without the need to prove 'insurability' such as undergoing a medical examination.

Typical Scenarios Where GIO Can Be Used:

• Changing jobs
• Moving house
• Having a child

Additional cover, covering areas such as critical illness, can be bought through the guaranteed insurability option at various times, sometimes at stated intervals during the mortgage term, such as every five years or upon the birth of a child.

Family Income Benefit

Family Income Benefit is another form of term life insurance. However, when the policy holder dies, instead of a lump sum being paid out beneficiaries will receive a regular income for the rest of the mortgage term. This type of option, which is sometimes referred to as family income assurance, is often ignored by those seeking life cover or mortgage protection policy, but can be a cheaper, if not the cheapest, option and still ensures your beneficiaries can meet mortgage repayments and receive further regular income.

Key Facts

• Low premiums: Family Income Benefit is one of the least expensive forms of Life Insurance premiums. As with a decreasing term insurance policy, money the insurer pays out decreases over time and is therefore less risky for the insurer
• Flexibility: money can be paid monthly, quarterly or annually, depending on your beneficiaries' needs. Some insurers can also offer this option for critical illness cover, whereby money is paid out in the event of the policy holder contracting a critical illness from a set list
• Tax savings: under current regulations Family Income Benefit is tax-free. This can make it a potentially more attractive option than a life insurance policy that pays out a lump sum, which if deposited can be subject to tax

Mortgage Payment Protection

In the event of an accident, illness, redundancy or becoming a carer, Mortgage Payment Protection ensures that your mortgage payments are paid by the insurer for a limited period of time.

Key Facts

• Around 500,000 new Mortgage Payment Protection insurance policies are taken out each year, according to the Association of British Insurers
• Of Mortgage Payment Protection insurance policies taken out each year around three quarters cover accident, sickness and unemployment, which is often shortened to ASU. The remaining quarter either cover only accident and sickness or unemployment
• Around 100,000 Mortgage Payment Protection insurance claims are made each year
• The average length of time of Mortgage Payment Protection insurance policy holders need to claim for is around six months

Typical Benefits

• Flexibility in terms of the length of time mortgage repayments are met
• Ability to add extra cover to ensure bills as well as mortgage repayments are met while not working
• If arranged through a mortgage lender, premiums can be paid together with your mortgage
• Some mortgage lenders and insurance firms also offer guidance about getting back to work and dealing with redundancy. This can be a help at a potentially distressing time

Income Protection

Income Protection guarantees that you and your family receive a regular income if you are unable to work due to injury, illness or redundancy. It is similar to Mortgage Payment Protection but offers more money to cover not only mortgage repayments but also household bills. As with Mortgage Payment Protection Insurance the typical cover can include accident, sickness and unemployment, or ASU as it is often known. Other terms used to describe Income Protection Insurance include: Long-term Disability Insurance and Income Replacement Insurance.

Why Buy Income Protection Insurance?

• Self-employed: this can be vital for self-employed people who do not have access to sick pay through work. However premiums for self employed people can be higher
• Add-on to benefits offered by an employer: if employed, check your contract, as your company may only pay your salary for a limited period of time. Income Protection Insurance could be vital to ensure you can pay bills and meet mortgage repayments long after work benefits have ended
• Faster payouts: the Association of British Insurers says that typically the period when the money starts paying out is faster than Mortgage Payment Protection policies

Exclusions

Those considering an income protection policy should be warned that most insurers will have a list of situations where they will not pay out. It is important to check with the insurer what is on their list. Typical situations on exclusion lists can include:

• Criminal activity
• Drug or alcohol misuse
• Self inflicted injury
• Pregnancy
• HIV/AIDS

Critical Illness Cover

A Critical Illness Insurance policy will pay out a lump sum to the policy holder when they become seriously ill or disabled. This usually includes a set list of core conditions such as cancer. Most insurers will have a list of around 25, but some can offer Critical Illness insurance for more, often around 35. Critical Illness cover is usually offered as an add-on to a Life Insurance policy but it can also be bought as a separate product.

There are a variety of different Critical Illness Insurance policies. Some are linked to a Term Life Insurance policy and finish at the end of the mortgage term, while others have no fixed term and can last beyond the mortgage term.

Who Can Take Out Critical Illness Cover?

• Most people between the ages of 18 and 60 in good health will have no problem arranging Critical Illness Insurance cover, according to the Association of British Insurers
• Many policies also offer the option of buying Critical Illness cover for children
• A policy can cover either just one person or yourself and a partner. If a policy is arranged for a couple then the insurer may only pay out when the first person becomes critically ill
• Those who have suffered from a serious illness or injury may have trouble arranging Critical Illness Insurance cover. However many insurers may offer the option of buying a policy that excludes the Critical Illness or conditions related to your illness or alternatively charge a higher premium
• Having a family history of critical illnesses such as cancer or heart disease does not exclude you from taking out a Critical Illness Insurance policy, however it may mean having to pay higher premiums

Conditions Covered

The range of illnesses and conditions covered in Critical Illness Insurance policies varies, however all should include cover against cancer, heart attack and stroke. The more conditions listed will result in higher premiums.

Critical Illness Cover policies will usually have a core list of conditions that are likely to include:

• Cancer
• Coronary artery by-pass surgery
• Heart attack
• Kidney failure
• Major organ transplant
• Multiple sclerosis
• Stroke

Other additional conditions likely to be included in a Critical Illness Cover policy can include:

• Aorta graft surgery
• Benign brain tumour
• Blindness
• Coma
• Deafness
• Heart valve replacement or repair
• Loss of limbs
• Loss of speech
• Motor neurone disease
• Paralysis/paraplegia
• Parkinson's disease
• Terminal illness
• Third degree burns

Conditions Not Covered

A number of situations where critical illness can occur are not included in many Critical Illness Insurance policies. These can include aviation, criminality, drug abuse, failing to follow medical advice and HIV/AIDS.

Buying Life Insurance

There are a variety of ways to obtain Life Insurance with the main options being either to shop around yourself, through your mortgage lender or via a third party adviser such as an insurance broker or independent financial adviser (IFA).

Medical certificates signed by a GP are not needed for every claim, as the workload required would bring British General Practice to a halt. Instead only those whom the insurer feels need to provide more information about a particular condition will need to supply such information. These will usually be those who have a history of illness.

A key piece of advice is to ensure that the person or firm who is selling you Life Insurance is registered with the Financial Conduct Authority. This ensures that they adhere to a tough set of conditions governing the sale of policies.

How Do I Get Life Insurance?

• Through a mortgage lender: the majority of Mortgage Payment Protection policies are arranged through a mortgage lender as it is often easier to arrange such cover and a mortgage at the same time. However cheaper options may be available by shopping around or using an independent financial adviser
• Through an independent financial adviser or insurance broker: this can cost in terms of charges, so can be a more expensive option; however during the stressful time of buying a house, it can save time and be worth the extra expense
• Shopping around: savings can be found in getting the best deal at no extra cost, but it is important not to choose only the cheapest option. The quality of the Insurance Policy, such as the number of conditions covered in Critical Illness cover, can also be important as is the level of customer service, should you need to make a claim

Making a Claim

When making a claim for a Life Insurance or Mortgage Protection payout the insurer will usually ask for documentary proof such as a death certificate or medical reports. The documents needed vary between insurers.

Typical Documents Needed

• The policy documents: these show proof of who is entitled to the claim and any changes to the policy since it was originally taken out
• A completed claim form
• In the case of Life Insurance, evidence of death is required. This will normally be a death certificate or a copy that the insurer has approved
• Proof of age of the deceased in the case of a Life Insurance claim is normally required; this will either be an original birth certificate or a copy of the birth certificate approved by the insurer
• If the deceased is married or in a civil partnership, a copy of either the marriage certificate or civil partnership certificate is required
• In the case of Critical Illness cover and other policies where proof of illness is required, medical records need to be supplied within a set time, often within 3 months of diagnosis

Can Claims Be Turned Down?

Around one in ten Mortgage Payment Protection claims are turned down each year. The most common reason being non-disclosure of information, such as a medical condition or change in employment. If such information has been deliberately withheld it is unlikely a claim will ever be paid.

Steps have been taken to reduce the number of claims that are refused for non-disclosure of information where no malice is intended, through guidance issued by the Association of British Insurers and the Financial Ombudsman. Called ABI Code of Practice on Misrepresentation and Treating Customers Fairly this makes a greater distinction between deliberately withholding information and not realising information was relevant. Where relevant information has not been provided, Insurers are now expected to pay customers a "fair sum", reflecting risk and premiums paid.

What Happens If Death Cannot Be Proved?

In rare cases when a body cannot be found, a death certificate cannot be signed until seven years have passed. This means that beneficiaries may have to wait until then before the Insurer will pay out.

Steps have been taken in recent years to speed up the process and make payments in such circumstances without a death certificate. This will usually mean the Insurer carrying out its own investigation and using a reasonable evidence test that death has occurred. This happened in 1995 when Insurer Norwich Union said it would use this test in the case of the victims of the Asian Tsunami disaster, where many bodies were not recovered.

Making a Complaint

Most Life Insurance and Mortgage Protection policies will be sold, arranged and managed without a hitch. But mistakes can happen and Policy-holders may have cause for complaint. Typical complaints related to Life Insurance, Mortgage Protection or Whole Of Life investment policies can include:

• Slow administration in dealing with a claim or making changes to a claim
• Being given wrong or misleading information about the policy
• Not being told about a particular condition in a policy
• Failure to act on your instructions
• Unfairly turning down a claim
• Not being given enough notice about any changes to a policy

Tips When Making a Complaint

Tips offered by the Financial Conduct Authority when making a complaint include:

• Being polite and clear about your complaint
• Making a note of the date and details of any phone or face to face conversations including the name of the person to whom you talked
• Writing a follow-up letter confirming any discussions made over the phone
• If writing mark your letter with 'complaint' at the top and ensure that it is legible
• Sending copies of documents and keeping originals
• Keeping a copy of all correspondence

A Step By Step Guide to Making a Complaint

1. The Association of British Insurers and the Financial Conduct Authority both recommend taking the complaint straight to the firm you have the issue with, which can be the Insurer or Independent Financial Adviser. All firms registered with the Financial Conduct Authority have a duty to provide a free and formal complaint procedure. They also have a duty to provide you with information about this service. Complaints to the Insurer or related firm can be made by telephone, in person or in writing.

2. Financial Ombudsman Scheme: if no resolution is found a Policy-holder can then take the complaint to an independent complaints scheme. In most cases this will be the Financial Ombudsman Scheme which will intervene, investigate and attempt to find a resolution. If they find wrong-doing they can order the firm under complaint to compensate for losses of up to £100,000.

3. There are a number of firms specifically set up to help Policy-holders to pursue a complaint. They will pay a fee which could be a set share of any compensation awarded. It is vital to check the fee structure before hiring such a firm. All firms offering such a service need to be authorised by the Ministry of Justice.

4. Other options can include civil court proceedings, but legal fees can be costly.

5. If the firm has gone out of business, you should contact the Financial Services Compensation Scheme. This can provide funds to meet protected claims, such as return of premiums, compensation or arrange a transfer to another Insurer.

6. The Financial Conduct Authority is the regulator and therefore does not investigate individual claims. However it can deal with complaints relating to financial advertising and allegations of unfair contract terms.

Useful Contacts