Life cover is often the starting point for most protection conversations.
It’s the most widely known about protection product and the most widely bought, with around 1.5 million policies a year sold, according to the Swiss Re Term and Health Watch figures.
But while life cover is viewed as being relatively straightforward, there are still various options and different products that can impact upon outcomes and client suitability.
I remember an advert on TV for life cover, not too long ago, where the company said their premiums don’t go up.
When you work in the industry you know that this is common – the premiums for the vast majority of life insurance plans don’t go up and so it’s far from being a USP.
But that’s not the point. Consumer don’t know this. They also don’t know what most of the options mean and which is best for them.
Barry Pappin of advisory firm Vita agrees that life cover can be complex: “The concept of life cover is simple. However, dig a little deeper and you’ll unearth a host of technical jargon, and a suite of variations and options.
“People’s lives don’t follow a set path and people need to protect different elements of their life, such as their family, their mortgage, their business or funeral costs.
“From an adviser’s perspective, the need and benefit of seeking advice is obvious.
“But customers, understandably, aren’t fully aware or don’t always appreciate the nuances between different types of cover.”
Here we look at 10 different types of life cover and how they are used.
Level Term Assurance (LTA)
LTA is the most common form of life cover, generally used to cover family responsibilities and/or a mortgage. The number of years the policy will run for and an amount of cover is chosen, and the premiums are usually fixed, and paid until the policy ends or a claim is made. Claims are generally paid as a lump sum.
When looking to cover a mortgage, LTA is suitable for interest only mortgages where the capital does not decrease over the term, but some people also like the extra cover that a level term policy would offer, even if the outstanding debt is reducing.
Decreasing Assurance (DTA)
There are two types of term assurance that decreases over the years, which could be used to cover repayment mortgages. Both tend to offer fixed premiums for the term of the life cover and pay claims in a lump sum to cover the outstanding mortgage debt.
Mortgage Payment Assurance (MPA) decreases specifically in line with the mortgage debt, while Decreasing Term Assurance (DTA) typically reduces by a nominal interest rate each month, such as 5 per cent.