This type of policy is in effect a type of a decreasing term assurance contract, where the sum assured is payable by tax free instalments from the date of claim until the original term expires. The sum assured reduces at a uniform rate. In the event of a claim, the value of the instalments payable may be exchanged for a lump sum. The amount of the lump sum will depend on interest rates at the time of the claim. It is possible to arrange such policies where the level of benefit increases at a pre-determined rate, e.g. 3%, 5% or 10% either simple or compound per annum, thus providing some defence against inflation.
For example, if you take out a family income benefit policy where the amount payable on his death would be an income of £10,000 per annum. The policy is written for a term of 20 years. If you die after 2 years, the benefit will be payable until the policy term expires, that is, £10,000 payable for 18 years. The initial sum assured would have been £200,000 i.e. 20 years x £10,000 p.a. benefit. Income instalments can be paid monthly, quarterly or annually
Due to advances in medical care, many people may consider the inclusion of critical illness cover as the likelihood of a critical illness claim significantly increases. Critical illness insurance is a benefit that can be either free standing or a "bolt on benefit".
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