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There are two different ways of taking
out life assurance:
1. Term Assurance.
2. Whole of Life.
1. Term Assurance
Although there are different types of term
assurance the common theme is that they
run for a specific term. After the term
has expired then the cover stops. There
is no investment element in these plans
whatsoever.
There are six different options:
a) Mortgage Protection
Mortgage protection is a type of term
assurance policy also called decreasing
term assurance. The initial amount of life
cover reduces each year, closely matching
the outstanding capital debt on your mortgage.
You should be aware that if interest rates
go over a certain % then your mortgage may
not be paid off if you die.
b) Level Term Assurance
This type of plan pays a lump sum in the
event of death during the term of the policy.
The contract contains no investment element.
If you were to fall ill after the policy
has expired, you would have difficulty replacing
the cover.
c) Increasing Term Assurance
Your level of life cover and premium
will increase each year normally by RPI
(Retail Prices Index) subject to a ceiling
of typically 10% per annum.
d) Convertible Term Assurance
This contract is similar to a level term
assurance policy with one distinct difference.
The policy may be converted into an endowment
or whole-of-life plan, regardless of state
of health. Clearly, this is a valuable facility.
Higher premiums are usually paid for this
type of life assurance compared with level
term assurance.
e) Renewable Term Assurance
A level/convertible term assurance policy
will expire at the end of its term at which
point, due to medical conditions, premiums
payable for further cover may be more expensive.
To provide some protection against this
eventuality, a renewable term assurance
policy allows the original policy to be
replaced with a new plan at the end of its
term, regardless of state of health.
f) Family Income Benefit
This is a life assurance contract, which
does not pay a lump sum during the term,
but, in the event of death, pays a regular
sum after death. The regular payment is
usually made from the date of death until
expiry of the policy term.
g) Endowment Assurance
A low cost endowment is a combination of
an endowment assurance policy and a decreasing
term assurance policy. These policies are
typically used to fund a mortgage repayment.
The endowment policy is structured so that
if bonus rates continue within the levels
quoted, the maturity proceeds should be
sufficient to repay the whole of a loan
(usually a mortgage), although this is not
guaranteed.
On death during the term the sum assured
will be paid by the combined value of the
endowment and the decreasing term assurance.
A full endowment is really an investment
contract so will not be covered here.
2. Whole of Life
Whole of life assurance, as the name suggests,
can provide life cover without imposing
a limited term. As with endowment policies,
they may be with-profits, unit linked or
on a low cost basis.
There is a choice between the maximum and
minimum levels of cover available at given
levels of premium. Standard cover basically
allows the same level of life cover to be
kept up throughout life, as long as the
fund achieves a specified minimum annual
growth rate. If this rate is not achieved,
you will either need to increase the premium
to maintain cover, or to decrease the level
of cover to a sustainable level. Whatever
level of initial cover is chosen, that amount
is guaranteed to be maintained for a specified
term (normally 10 years).
This plan is subject to regular reviews
and should fund performance be less than
that anticipated then your premium might
have to be increased.
Term assurance, as you would imagine, is
for a specific term and has no investment
element and therefore no return. This is
the "no frills" approach but it
does have two main advantages:
1. It is cheap.
2. The premiums can be guaranteed not to
increase (provided you pick the right provider).
As you would imagine the reverse is true
in many aspects of whole of life as you
have an investment element that would normally
return approximately half your premiums
at around age 65. Obviously this can be
more or less than this. The premium is reviewed
each year so if the performance is not so
good, or the life company's mortality rate
increases, then the life company can increase
your premiums. However any increase would
not usually happen for at least ten years.
Having said this, whole of life has three
significant advantages.
1. You are guaranteed to be insured for
as long as you live. This has obvious Inheritance
Tax planning advantages.
2. You may get back more than you paid in
if funds do well.
3. It is easier to put inflation proofing
on to the contract.
Whole of life is most useful if there is
likely to be an inheritance tax liability.
One last point on whole of life is that
you can either opt for a balanced or maximum
approach. A balanced approach means that
provided the reviews go as planned then
the premium will not increase over the term.
A maximum basis is like a low start in that
the premiums will remain the same for the
first ten years after which they will increase
quite dramatically at each review.
You will have the option of either maintaining
the life cover at a higher premium or maintaining
the premium and dropping the cover.
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