Where an adult has dependents – i.e. people who rely on him/her financially – then there is a life cover need. Sometimes more appropriately called death cover, it is designed to replace the income of the deceased person or to repay loans, thereby avoiding financial hardship to the dependents.
The three main types of cover are: Level Term Assurance, Decreasing Term Assurance (usually for loan protection) and Family Income Benefit. As a rule of thumb, to arrive at a sensible amount of death cover, from a salary earner’s gross annual income you should deduct any annual outgoings for things such as loans that would be repaid, and any other expenditure that would cease on death.
The amount of cover should be roughly 25 times this net figure.
CRITICAL ILLNESS COVER
This form of protection usually provides a sum assured as a lump sum on the first diagnosis of a specified list of critical illnesses, and enables the policyholder to (hopefully) recover from the illness without being under any financial pressure – without it you might survive, but your financial situation may not! A sensible level of cover should be around 5 times annual gross salary plus any unprotected loans.
There are policies that will protect you against short term accidents, sickness or unemployment – ASU plans – and these are usually linked to a loan or mortgage. The maximum term of pay out for a claim is usually 12 or 24 months.
Permanent Health Insurance (PHI) is a contract provided by an insurer that will normally pay a proportion of your salary if you are unable to work due to long term illness. The important difference with this sort of policy is that, as its name suggests, the contract is permanent, which means that the insurance provider cannot cancel the policy (although you can) if you suffer long term/permanent illness.
ASU and PHI cover is a complex area, usually requiring specialist financial advice, and it is important to understand just what providers will and will not cover. The content of this website is for informational purposes and does not constitute professional financial advice and should not be viewed as such.