Insurance and warranties

Life Assurance

The term ‘assurance’ often confuses but in reality it is just another type of insurance. ‘Insurance’ will cover you against an event that might happen and ‘assurance’ will cover you against an event that will happen, provided it happens during the term of the policy.

A life assurance policy covers you for a set period of time. If the policy holder dies during the policy period then the insurance company will pay the agreed sum to the beneficiary assuming there are no complications affecting the validity of the policy. There will therefore only be a monetary value to the policy if the policy holder dies. Most mortgage companies require you to have life assurance prior to releasing your mortgage monies. Where the policy period is only for the term of the mortgage then this is referred to a ‘term’ life assurance. When the mortgage is fully paid back the assurance stops and that’s the end of the financial arrangement.

If you require some kind of financial investment portion to your life assurance then the policy premiums will be greater and will again depend on which type of policy you obtain. Whole life policies will provide for the investment of a portion of your premium payment although the potential returns will depend on the market conditions during the period of investment.

Endowment policies are similar except that they provide for a greater investment portion of your premium in order to earn, by investment, the agreed payout value of your policy by a much earlier date, thus relieving the insurance company of having to pay out from their own funds. Many mortgage companies used to accept endowment policies as a suitable form of life assurance against which to secure a mortgage. Theoretically endowment policies aim to have earned, by investment, at least enough to pay your mortgage with the possibility of additional funds to spare. Current market conditions however mean that many endowment policies have fallen short of their earning potential leaving homeowners to find the additional funds to pay off their mortgage, if their mortgage term is finished. Other endowment policy holders have had to dramatically increase their premium instalments in an effort to correct the underachieving investment history with greater investment levels in the future. For this reason most, if not all, lenders will no longer accept endowment policies as suitable mortgage compliant life assurance.

Income Protection Insurance

The reality for most people is that they borrow to build and to do so, they must have a secure income. Income Protection Insurance provides cover for the possibility of losing your income through illness or injury and in some cases redundancy. Again there are various choices within the scope of this insurance. Most policies will be renewable annually although the period covered may go up to the normal retirement age. The level of payment will vary; some will agree to an amount perhaps based on your mortgage or loan repayments while others will provide a replacement income. With any insurance policy it is important to know both the levels and limits of the cover, but with health-related policies it is essential to understand any preconditions relating to the type of illness or injury and how it is determined by a medical professional. Remember it is possible that a claim paid under another insurance policy may affect your right to claim under an Income Protection policy if the first monies you receive are deemed to relieve your insurer of their obligations.