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  Life Assurance

Life Assurance

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.

Whole of Life V Term Assurance

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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