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From Adviser Guide:

Q: What are the different types of protection policy?

Policy types are many and varied, but the core areas of family protection are life insurance, critical illness cover and income protection.

By Emma Ann Hughes | Published Feb 15, 2012 | comments

Life insurance pays out an agreed amount to a person’s family or other named beneficiaries if the customer dies during the duration of the policy.

There are two main types of life insurance, according to Louise Colley, head of protection marketing at Aviva.

1) Mortgage life insurance (MLI), which provides cover for a mortgage or loan. Mortgage life insurance tends to be ‘decreasing life insurance’ which decreases in value in line with the mortgage.

2) Term assurance runs for a set period of time (the term).

The term can be decided by the client – for example, some people will choose for the policy to finish when they feel their children will be financially independent.

Term assurance tends to be ‘level life assurance’ which offers a fixed lump sum decided at the policy’s outset.

According to Ms Colley, most providers will also offer the option to pay out if the policyholder is diagnosed with a terminal illness at any time before the last 18 months of the plan term, and is not expected to live more than 12 months.

The plan only pays out once, so if a customer receives a payout for a terminal illness, the plan will end.

There are other, more specific, types of life insurance which are usually tailored for people over the age of 50, sometimes with an upper age limit.

According to Ms Colley, these include:

3) Guaranteed whole of life insurance, which guarantees people will be able to leave money for their loved ones when they die.

4) Guaranteed lifelong protection plans, which enable people to leave a small amount of money at their death, often to help cover funeral costs.

Ms Colley said policyholders should be aware that the vast majority of plans have no cash in value at any time.

If the client stops paying the premiums or survives to the end of the plan term the cover will end and no money will be returned to them.

* Income protection offers the customer a regular income, should he or she be unable to work for a prolonged period of time due to sickness or injury.

The payments normally commence after a deferred period and cover a proportion of the claimant’s income until they can return to work or reach retirement.

Ms Colley said most policies will provide a continued benefit if the customer goes back to work in a reduced capacity, with a reduced salary.

Income protection should not be confused with Accident, Sickness and Unemployment cover, she added.

* Critical illness cover is a form of insurance that provides a lump sum payment or a regular income to the customer if they have a serious illness or condition that is covered under the policy’s terms.

Ms Colley said most critical illness cover is provided as an optional extra to a life insurance policy (few providers offer stand alone critical illness policies). Critical illness or life and critical illness pays out a lump sum or a monthly income until the end of the policy term, if you either die or are diagnosed with a critical illness that meets the policy definition (which may mean you have to survive for at least 14 days).

It is important to note, she said, that each policy covers critical illnesses defined in that policy and no others.

Most policies cover around 30 to 40 conditions, according to Ms Colley, although the top five conditions make up around 90 per cent of claims paid.

She said: “It is also important to note that some conditions, including cancer and heart attacks, need to be of a certain severity in order to meet the criteria for a claim to be paid.

“Where a condition has a very good recovery rate – for example, in situ cancers – most insurers will deem that they do not fall into the critical illness category.

“This ultimately helps to keep the cost of CI cover more affordable.”

Some critical illness policies also offer proportional payments – for example, for low grade prostate cancer.

Ms Colley said these proportional payments normally enable the customer to receive a payout while the policy continues to run.

* Mortgage Protection Payment Insurance (MPPI) covers the customer’s mortgage payments in the event of them being unable to work due to an accident, sickness or unemployment.

* Accident Sickness Unemployment (ASU) provides an income for customers who are unable to work because of accident, sickness and unemployment.

Payments often continue for up to a year, or when the claimant returns to work.

Policies are also defined by the term they are held for.

* Term provides cover for a specified period of time, which could fit in with say a mortgage or a retirement date.

From a business perspective, Jennifer Gilchrist, senior product development manager of Bright Grey and Scottish Provident, said there are specific business related covers for shareholder and key person protection.

The different types of protection cover typically offered under term contracts are:

1) Life cover

2) Life or critical illness cover

3) Critical illness cover

4) Income protection

5) Unemployment cover

6) Waiver of premium cover

* Whole of life provides cover for life that can be used for personal, business or inheritance tax mitigation.

The different types of protection cover usually offered under whole of life contracts are:

1) Life cover

2) Life or critical illness cover

3) Critical illness cover

4) Waiver of premium

According to Simon Wilkins, protection proposition manager of Zurich UK Life, the main types of protection policy have been created by the insurance industry to meet the following protection needs:

* Death

* Health, incapacity or accident

* Income, mortgage or other debt

* Asset protection

* Business protection

Mr Wilkins said policies available to the adviser for recommendation will depend on their regulatory authorisation (COB, ICOB and MCOB), regulatory status and business model.

For example, he said some advisers while authorised to offer general insurance solutions may choose not to, preferring to refer clients to a specialist broker.

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