Life Insurance: What's Covered And What's Not

Life insurance is an agreement between an insurer and an individual, where the insurer agrees to pay a chosen beneficiary a sum of money in exchange for a premium upon the death of the insured. It can also pay out if the insured is diagnosed with a terminal illness or disability. There are two main types of life insurance: term life insurance and permanent life insurance. Term life insurance covers you only when you need it most, and you can choose how long the insurance policy will be in effect. Permanent life insurance, on the other hand, is more expensive and complex as it comes with a cash value that acts like a savings or investment account and grows over time.

Terminal illness cover

A terminal illness is defined as a condition where a physician certifies that a patient has a terminal condition and is expected to live for six months or fewer. This includes progressive diseases that worsen over time, such as cancer or advanced heart disease.

If you are terminally ill, guaranteed issue life insurance may be your only option for coverage. This type of policy is simple and straightforward and does not require a medical exam or health questions. However, the face amount is usually modest, and there may be a graded benefit period where the full death benefit is not paid out until a specific time has passed (often two years).

If you are diagnosed with a terminal illness and have an existing life insurance policy, your beneficiary will receive the full death benefit. You may also be able to access funds through an accelerated death benefit rider.

Funeral costs

Life insurance can help your family cover funeral costs, so they don't have to worry about finances during a difficult time. It can be used to pay for burial or cremation costs, and some policies even offer a guarantee that the payout won't be less than the total paid in premiums. This is sometimes called a premium guarantee.

Funeral insurance is a type of life insurance that pays a lump sum benefit, usually up to $15,000, so your loved ones can meet the cost of your burial or cremation without using their own money. This type of insurance usually comes in the form of a low-payout, short-term (often 10-year) term life insurance policy.

In addition to funeral costs, life insurance can also provide a lump sum payment or regular income to your family in the event of your death, serious illness, or injury. This can help cover mortgage payments, medical bills, and other ongoing expenses. It's important to note that life insurance policies can vary significantly in terms of what they cover and exclude, so it's essential to carefully review the policy documents and understand the fine print before purchasing.

When considering life insurance, it's crucial to assess your needs and circumstances. Factors such as your age, health, lifestyle, occupation, and existing debts will impact the cost of premiums and the level of cover provided. It's also important to be honest and disclose any pre-existing medical conditions to ensure that your policy remains valid in the event of a claim.

Whole life insurance

The cash value of a whole life policy typically earns a fixed rate of interest. Withdrawals and outstanding loan balances reduce death benefits. The cash value offers a living benefit to the policyholder, meaning they can access it while they are still alive. Withdrawals are tax-free up to the value of the total premiums paid. Interest is charged on policy loans, with rates varying per insurer, but they are generally lower than those for personal loans or home equity loans.

Universal life insurance

Flexibility

Cash Value

Lifelong Protection

Investment Savings Element

The cash value component of universal life insurance offers an investment savings element. Policyholders can choose how much of their premium payment goes towards the death benefit and how much goes into the cash value account. The cash value earns interest, and any interest earned is tax-free, providing an additional source of income for policyholders.

Adjustable Premiums

Income protection

The income you receive from income protection insurance will not be the exact amount you were earning before. You can expect to receive about half to two-thirds of your pre-tax income. This is because some money will be deducted for state benefits, and the income received from the policy is tax-free.

There are different types of income protection insurance policies, offering short-term and long-term cover. Short-term income protection covers you for accidents, sickness, and unemployment if you are unable to work for a short period, usually six to twelve months, although some policies provide cover for up to two years. Long-term income protection covers you against accidents and sickness if you become seriously ill or permanently disabled. It will not cover unemployment.

When considering income protection insurance, it is essential to carefully review the terms and conditions of the policy. Understand what you can claim, when you can claim, and the amount you are likely to receive. Additionally, be aware of any exclusions or pre-existing medical conditions that may not be covered.

The cost of income protection insurance depends on various factors, including your age, health, job, monthly outgoings, debts, marital status, and lifestyle. It is recommended to have enough savings to cover at least three months' worth of living expenses, but income protection insurance can provide additional security if you are unable to work for an extended period.

Frequently asked questions