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life cover |
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At its simplest, life assurance helps families continue to pay the bills if one partner dies. Most families would have their mortgages paid off if one partner died from the life assurance normally arranged with it. But without extra cover the survivor and children could struggle to pay all the other bills.
It is worth checking how much cover you may already have which may be through existing policies or your employer.
If you need additional cover, this can be straightforward and cheap using a type of life assurance known as Term Assurance. This only provides cover for a fixed term and therefore may not be suitable for Inheritance Tax planning. In these circumstances, you may consider Whole Life Assurance.
It is usually possible to include Critical Illness as an option to either type of life assurance arrangement.
Term Assurance
Term Assurance is basically a bet on whether you will die within a specified period, "the term". This might be 10, 15 or 20 years although you can arrange policies to cover you for periods as short as one month. If you are alive at the end of the term, the policy ends and no payment is made. This is one of the cheapest life assurance policies you can buy.
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There are many different types of life assurance available, each providing different benefits and all can be arranged on either a single or joint life basis. The following are a summary of the main categories:
- Level Term Assurance
In this form a policy will pay a fixed sum on death during the term. At the end of the term the policy ceases with no maturity value. This policy does not require a surrender value. Generally, this is the cheapest form of life insurance cover and can be used to provide business or family protection or cover loans.
As an alternative, it is possible to arrange a Level Term Assurance that provides whole of life cover rather than for a fixed term. Whilst this can have its advantages, cost can be an issue. Please contact us should you require more information on whole of life level term assurance.
- Renewable Level Term Assurance
The only difference between this contract and a Level Term Assurance is that at maturity, the policy can be renewed without any additional medical evidence. The insurer will impose an additional charge for this renewal option and therefore, the premium will be more expensive than Level Term Assurance.
On renewal, the revised premium charged by the provider will be based on the current age of the life assured and using the rates that apply at that time.
- Convertible Term Assurance
These policies are similar to Level Term Assurance. However, they allow conversion, without further medical evidence, to a different type of policy from the insurance company’s range. These may include whole of life, endowment, further term cover or other options. It is important that cost is not the only consideration taken into account as the type of contracts into which the client can convert is an important factor.
- Family Income Benefit
These policies provide a regular tax-free income to assist the remaining members of the family. It is important to protect the benefits from the effect of inflation and this can be done by index linking the policy. Premiums are competitive, as contracts are written on a decreasing basis which means the cover reduces over the term of the policy.
- Mortgage Protection
Mortgage Protection provides a guaranteed sum assured, which reduces at each plan anniversary throughout the term and is designed to match the maximum amount that should be outstanding during the coming year under a repayment mortgage, normally assuming an interest rate of no more than 10%. This means you have peace of mind knowing that your dependants should be able to remain in the property free from the mortgage.
However, you should be aware that if interest rates exceed the assumed amount, then on death, the policy proceeds might be insufficient to repay the loan. Therefore, regular reviews are recommended.
Whole Life Assurance
As the name suggests, this type of plan provides life assurance protection until death, whenever that may be, provided premiums are maintained.
There are two types of plan available:
- Unit Linked Whole Life
- Guaranteed Premiums
Unit Linked Whole Life
The main attraction of a Unit Linked Whole Life contract is its flexibility and the range of benefits and options which can be included making it possible to adapt the policy to a range of needs throughout the lifetime of the contract.
Policies are usually offered with cover on either minimum, standard or maximum cover basis.
- Minimum Cover is usually the lowest sum assured allowed by the Inland Revenue to meet qualifying policy rules, so it is basically an investment policy with a small element of life cover.
- Standard Cover is the sum assured the insurer considers can be maintained without premium increases throughout the life of the policy.
- Maximum Cover is the highest sum assured the insurer would provide for a given premium until the first review of the contract (usually 10 years). These are designed to provide relatively cheap life assurance until the first review after which the premium is likely to significantly increase. In this form, the policy is similar to a term assurance policy but with the advantage of continued insurability.
Premiums paid are used to buy units in an investment fund offered by the insurer. The cost of the life cover is then funded by cancellation of an appropriate number of units. In order to give some stability to your monthly expenditure, most insurers guarantee that the initial premium will remain level for 10 years. After 10 years, a review will be carried out.
At the 10-year review, the insurer will consider the current value of your policy and their own claims experience and decide whether or not the premium will need to be increased. Subsequent reviews are then usually carried out every 5 years.
Guaranteed Premiums
The premiums for most whole life plans are reviewable. This is because whilst the insurer realises that at some time in the future they will have a claim to settle under the policy, they are obviously unaware of when this will be.
The advantage of reviewable premiums is that the cost is kept down in the early years when you are younger and the cost of life assurance is cheaper. However the disadvantage is that it is likely that the premium will have to be increased at each review as the cost of life cover increases with age. Therefore, you do not know what premium you will be paying in the future. You may find that the revised premium is unaffordable and therefore find it necessary to reduce the cover or cancel the policy just at a time when it is most necessary.
As the names suggests, a Guaranteed Premium policy guarantees that the premium remains at its initial level throughout the life of the contract. This has the advantage of providing peace of mind and enables you to budget accurately. The disadvantage is that the initial premium is considerably more expensive than that offered by a Unit Linked Whole Life policy arranged on maximum cover basis.
Comparison
Below we summarise some of the advantages and disadvantages of the two types of plan mentioned above.
| Plan |
Advantages |
Disadvantages |
| Unit Linked Whole Life |
- Investment element is included. Therefore, if you decide in the future that the policy is no longer required, there may be a surrender value available.
- The policy offers the maximum possible sum assured for the minimum possible premium.
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- Future premiums will depend to some degree on the investment performance of the funds selected.
- It is likely that the premiums will need to significantly increase in the future
- The premiums are reviewable
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| Guaranteed Premiums |
- The initial premium is guaranteed to remain level throughout the life of the policy.
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- The policy does not include any investment element and will therefore never acquire a surrender value
- The initial premium is expensive
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