Jargon Buster

Let’s make protection simpler

Insurance Jargon Buster

Insurance can be confusing, and there is absolutely jargon, we don’t like jargon. Below is a quick guide to the different types of insurance.

  1. 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.

  2. Many employers provide death in service 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. Critical illness cover can also be included.

    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.

  3. A pre-existing 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.

  4. 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. 

  5. 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.

  6. 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.

  7. 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 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 policyholders die at the same time.
  8. 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. 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.

  9. Living benefits pay out while the policy holder is still alive – an example of this could be critical illness cover.

  10. 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.

  11. 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.

  12. 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.

  13. 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.

  14. 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.

  15. 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.

  16. 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 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 assurance 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.
  17. This is often included as a 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.

  18. 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 (single person). 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 means the policy proceeds wont trigger IHT when in trusts.

    This means 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.

  19. 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.