Insurance Terminology

Insurance terminology can be confusing. We try to make advice around insurances easy to understand. 

We’ve put together this page to help you understand insurance terminology a little easier. We’ll also cover a little more about the insurance application process and what can effect premiums at the bottom of the page. 

Life Insurance  

What is Life Insurance? This is a type of insurance policy that can pay out a cash lump sum if you die. Life insurance often includes a feature called ‘Terminal Illness Cover’. This can sometimes be confused with ‘Critical illness Cover’ which we will cover next. But, Terminal Illness Cover is a feature where a life insurance policy can pay out if you are given typically less than 12 months to live.

Critical Illness Cover (CIC) 

What is Critical illness Cover? This is a type of insurance policy that can pay out a cash lump sum if you are Diagnosed with an illness/condition that is covered by the policy. It is important to understand it is paid on diagnosis – you do not have to die. Although now days many people can recover from a serious illness, the long-term impact of an illness can bring financial implications and may affect the ability to return to work at all. This type of policy typically comes with Life Cover also included and will be labelled as Life or Critical illness Cover. 

Decreasing term assurance 

What does Decreasing term assurance mean? This means the amount that you are covered for by your insurance policy decreases over the ‘term’ of the insurance policy. (The term is how long the policy lasts, for example, 20 years, 30 years etc) This is how we would typically structure a policy that is taken out to ‘protect’ a decreasing debt, such as your mortgage.

Level term assurance 

What is Level Term assurance? This means the amount that you are covered for remains the same throughout the term of the policy. Where decreasing cover is often used to protect a mortgage, Level term assurance is often used to provide an additional level of cover for families and loved ones. Ensuring that a specific amount of cash can be left behind in the worst-case scenario.

Joint or Separate policies 

What does it mean to have joint or separate insurance policies? Well, pretty much what it says on the tin. If you have a joint policy, it can only pay out on a first event basis (first death for example). Whereas if you each have your own independent (separate) policy, no matter what happens to the other person, your own policy remains. The cost difference is often quite small to have separate cover, but having separate plans can add far more value to you as a couple/family. A lot of people opt for separate plans, and we normally recommend them where affordable, but you are free to go with joint if you preference or more suitable to your budget.

Family Income Benefit (FIB)

What is Family Income Benefit? This is type of Life Insurance that can pay out a tax free sum each month to you surviving family if you were to die. This is seen as a way to ensure that ongoing lifestyle costs can be maintained for surviving partner and any children. This can be a very cost effective policy.

Income Protection (IP)

What is Income Protection? IP is type of insurance that can pay out a tax-free sum of money each month if you are ever unable to work due to illness or injury. Think of it like an enhanced version of ‘sick pay’ that you may receive from an employer. However, Income Protection can be taken out by employees and also self-employed people. 

Income protection has several important elements that make every policy individual: 

• Cover/Benefit amount – how much it can pay out each month tax free (typically capped at 50-60% of your regular gross/pre-tax income)

• Deferred period – how long you need to be off work ill/injured before the insurance policy can start to pay out. This is typically either 1 week, 1 month, 3 months, 6 months, or 12 months.

• Policy term – how long the policy can last for.

• Payment/claim period – how long you can receive payments for if you were to make a claim. Typically, 1 year, 2 years, or full term (to the end of the policy)

Guaranteed premiums 

What are Guaranteed premiums? This means the monthly premiums will stay the same throughout the term of the policy. With Guaranteed premiums you can be sure of the costs for the foreseeable future.

Age related premiums 

What are Age Related Premiums? This is something typically found in the Income Protection world. It basically means the premiums increase as you get older, year on year. This can be reasonably priced in the short term. However, these types of premiums can get very expensive, very quickly. It can be a good solution for a short period of time.

Insurance Application Process – how does it work? 

Ever wondered what the process is like when applying for insurance? Once you and your broker have established which policy you would like to apply for, the next step is a full health questionnaire. You advisor will go through this with you and typically starts with your height and weight, and then quickly moves on to covering pretty much any condition you can think of. 

The purpose of this questionnaire is to establish a clear picture of your medical history so that the insurer is able to make a decision to offer your terms of insurance or not. I’m sure it goes without saying, but it’s very important to be as honest and accurate as possible with any disclosures you make. The last thing you want is to take out a policy only to find out you’re not covered when you need it because you failed to disclose information about your medical history when applying for the insurance. 

After the application is complete, if you have made any medical disclosures, the insurer may sometimes want to request a report form your GP to clarify the facts. This is handled entirely by the insurer, making your life easy. 

Following any medical underwriting, all being well you should receive your ‘terms of insurance’. This is a document confirming if the insurer is happy to offer you the insurance that you have applied for. It will also cover any changes from the original quote, such as Rated Premiums or Exclusion. 

Rated Premiums and Exclusions

What are Rated Premiums? This is when the insurance provider increases the premiums from the original quote price based on your disclosures during the application. 

Things that can cause your premiums to increase:

• Smoking – this also includes any nicotine products including vaping and gum
• Height & Weight ration – otherwise known as high BMI. People with a BMI above 30 can typically expect their premiums to increase. You can check your BMI on the NHS website here
• High risk activities – this covers obvious things like parachute jumping and hang gliding, but some insurers also include more common activities such as horse riding and riding a motorbike
• A perceived increase in risk due to a medical disclosure – It’s quote common for Income Protection and Critical Illness Cover to have ‘exclusions’ for any pre-existing conditions. But sometimes insurers will also increase the premiums if the applicant is deemed to be a higher risk following complex medical disclosures. 
• Family history – if you have any hereditary conditions that run in your family, this can also result in rated premiums. 

You can find more information on our personal insurance page. 

If you have any question about insurance or would just like to chat with someone about your options, feel free to get in touch.