Life insurance is important to give your loved ones financial protection should the worst happen. Use our jargon buster to cut through complex but frequently used life insurance terms so you can navigate your way to the right policy for you and your family.
This is the person or persons who will receive the pay out on your life insurance should you pass away during its term. It is up to you to choose your beneficiary – it is often your partner, spouse or children.
Critical illness cover
Critical illness cover pays out a lump sum if you’re diagnosed with an insured medical condition during the term of your policy. It’s not common to get standalone critical illness cover, but most life insurance policies will offer the chance to add it as an extra.
If you take out critical illness cover alongside your life insurance, you can often choose between combined cover which pays out once - either when you pass away or when you are diagnosed with a critical illness – or additional cover which will pay out both when you pass away or if you are diagnosed with a critical illness during the length of your policy.
Death in service benefit
Many employers provide a death in service benefit to their employees. This is a lump sum pay-out to whoever you choose should you pass away while in service to your employer. You don’t have to have passed away at your company premises or in a work-related accident for the benefit to pay out – you just need to be on the company payroll.
The money is tax-free and is typically a multiple, for example three or four times, your annual salary. But death in service benefit only lasts as long as you are employed by the company – you are no longer entitled to receive it should you stop work or change jobs, unless of course your new employer offers the benefit.
Existing medical conditions
A pre-existing medical condition is any kind of illness or injury that you have had treatment for at the time of taking out your life insurance or before. It can be a long-term condition, or one that you have recovered from such as cancer, high blood pressure or cholesterol.
It’s important to declare any existing medical conditions at the time you take out life insurance as if you don’t then your policy will almost certainly be invalidated when your dependants make a claim.
Family income benefit
Family income benefit policies pay out a regular monthly income to your beneficiaries from the date of the claim to the end of the policy term. The total amount paid out by the insurer is generally lower than under term policies, so the monthly income wouldn’t be enough to pay off an entire debt – but it could help stay on top of monthly mortgage payments or rent. As the pay-out is generally lower, the premiums are too.
Inheritance tax is due on the value of your ‘estate’ - all your possessions including money, belongings and property - above a threshold of £325,000, levied at 40% unless you leave everything to your spouse or civil partner. If the value of your estate is more than £325,000, tax is due only on anything above that sum. Proceeds from life insurance are counted as part of your estate.
Investment-linked life insurance
This is also known as an endowment policy and works by splitting the amount you pay for your life insurance between funding your lump sum pay-out and being invested by your insurance company. Your pay-out’s value may rise or fall due to the performance of the investment.
Joint life insurance
Joint life insurance covers two people on the same policy for the cost of one monthly premium. It can be an option if you are a couple but can also work for business partners. Under a joint life insurance policy there is only one pay-out, but when that happens depends on if you have a ‘first death’ or ‘second death’ policy.
- First death policy: A life insurance pay-out is made after the first death that occurs. A second payment will not be made upon the second death, so the survivor will no longer have life insurance cover
- Second death policy: A life insurance payment is made only after both members of the couple have passed away.
The most common type of joint life insurance is a first death policy. There will also only be one pay-out if both policy holders die at the same time.
Life insurance quote
This is the initial price quoted to you for your life insurance. This is what you will see when you first apply to take out a policy or when you compare life insurance quotes on a site such as MoneySuperMarket. The final price of your life insurance may differ from the quote, depending on extra information the provider may ask for or certain conditions that are disclosed through any further checks.
Living benefits pay out while the policy holder is still alive – an example of this could be critical illness cover.
Mortgage protection insurance
Mortgage protection insurance is a type of life insurance policy that covers the outstanding debt on your mortgage should you pass away before you pay it off. The pay-out under this type of policy will decrease in line with the reduction of debt.
Over 50s life insurance
Life insurance cover specifically for people aged over 50. It offers guaranteed acceptance regardless of your current health or lifestyle and guarantees a pay-out should you not miss any payments and you survive a qualification period.
The duration of your life insurance policy (for example, if you take out a policy covering you for a certain number of years) is your policy term. You can choose the term of your policy.
The cost of your life insurance policy is referred to as your premium. It is usually broken down as monthly payments, but some insurers offer the option to pay annually.
Single life insurance
A single life insurance policy covers an individual, rather than a couple who can be covered by joint life insurance. The chosen amount of cover is paid out if that individual dies within the life insurance term – the length of time the policy is set for.
Also known as the amount you’re covered for, the ‘sum insured’ is the amount your life insurance cover will pay out to those you choose as beneficiaries. You choose the amount you want to be covered for. If you’re unsure how much life insurance you think you should take out, our life insurance calculator will help you total up how much you will need to ensure you’re not over-paying.
Term life insurance
This is the most common form of life insurance and falls into three main types:
- Level term: covers you for a set sum that remains the same during the term. You pick the size of the pay-out, known as the ‘sum insured’ and an amount of time you’re covered, called the ‘term’. Both the sum insured and the premiums are fixed with a standard level term life policy. If you don’t pass away during the term, your policy lapses and you’ll need to take out a new life insurance policy.
- Decreasing term: is usually taken out to ensure a specific debt is covered – usually a mortgage. If you’re steadily paying off your mortgage, in the event of your death your dependants would need less money to cover what remains of it as time goes on. Decreasing-term life insurance ensures that if you die, your loved ones are covered for the outstanding debt.
- Increasing term: where the pay-out increases over time to keep pace with the rising cost of living. The sum assured either increases by a fixed percentage each year or is pegged to the Retail Price Index. As the amount of cover increases over time, premiums are more expensive than other types of life insurance.
Terminal illness cover
This is often included as standard in life insurance policies. It means your insurer pays out if you are confirmed to have a terminal condition and you’re likely to pass away within 12 months.
The proceeds of a life insurance policy are not subject to income tax or capital gains tax, but they are potentially liable to inheritance tax, if your estate is valued above £325,000. When you write your life insurance ‘in trust’, you effectively transfer ownership of the policy to the trust (although you remain responsible for paying the premiums).
This mean the proceeds, if there’s a claim, are not included within your estate, so they do not affect the IHT calculation and will be paid in full. Since the proceeds fall outside your estate, they are also not subject to probate, which means they can be distributed much more speedily than would otherwise be the case.
Waiver of premium
Some policies will offer waiver of premium as an add on to your policy, which covers the cost of the policy premiums should you find yourself unable to work due to sickness or injury.
Whole of life insurance
This is a type of life insurance that covers your life (rather than a set number of years as a term) and so guarantees a pay-out to your chosen dependants. As it is certain your policy will pay out, whole of life insurance tends to be more expensive than term-based policies.
It is also worth knowing that while some of these types of life insurance policies can be fixed – so you know the cost of the premium from the outset – they are more frequently investment linked, which just means they are linked to an investment fund. In this case, your premium is typically set for a number of years but is then reviewed. If the investments are not performing well, your premium could be increased, or the level the sum insured, or cover, reduced.
Get the right life insurance cover for your family
Finding the right life insurance to protect your loved ones couldn’t be easier at MoneySuperMarket. Just use our life insurance comparison tool to answer a few questions about your health and lifestyle, the amount of cover you need and how long you want to be covered for.
You’ll need to make sure your responses are accurate to make sure your dependants would receive a pay-out if you passed away.
Some prices will be guaranteed and fully underwritten which means you can buy immediately. With some you’ll need to confirm certain details with the insurer.