LIFE
ASSURANCE FACT SHEET
A
life assurance policy is designed to pay a tax-free lump sum or
income on the death of the insured life. The cover can also be
extended to include payment in the event of a Critical Illness
e.g. a heart attack, stroke, cancer or any of a number of other
specified conditions. The attraction of critical illness cover
is that it pays out while you're alive to provide you with substantial
funds when you need them most.
The
two most popular types of policy are Term Assurance and Whole
of Life Assurance. They can be used to provide financial protection
for families or businesses and to cover borrowings such as repayment
mortgages or business loans.
Term
Assurance
As
the name suggests, a term assurance policy provides protection
for a specified period of time and will expire without value if
there has been no claim by the end of the term. The term is chosen
at outset and might be determined by the length of a mortgage
or until your youngest child reaches 21 and is hopefully no longer
financially dependent on you! Alternatively, the cover might run
until your pension commences. There are broadly four versions
of term assurance from which to choose:-
1.
Level Term One of the most popular types where the cover and
premium normally remain fixed during the set term. However some
companies may have low initial premiums which are subject to review
every 5 years or they could even increase annually!
2.
Decreasing Term The most common form of decreasing term assurance
is Mortgage Protection Assurance under which the level of cover
will decrease in line with the reducing balance of a mortgage.
3.
Renewable/Convertible Term ensures that either during or at
the end of the set term, you can extend the term or possibly convert
to another type of policy such as a whole of life or endowment
assurance with the same insurance company for the same amount
of cover. The option to renew or to convert allows the new policy
to be arranged at standard rates irrespective of your state of
health at that time. The premium for the new policy will be based
on your age at the time of the conversion or renewal.
4.
Family Income Benefit provides monthly instalments of tax-free
income each year for the remaining term of the policy. Hence a
policy taken to insure an income of £10,000 each year with a 20
year term would pay the income for 1 year if the life assured
were to die after 19 years. Because the insurers liability decreases
each year that the life assured survives, the premiums for this
type of policy are relatively low and it provides a cheap form
of financial protection form a family.
WHOLE
OF LIFE
As
the name suggests this type of cover goes on as long as you do!
It will payout on death whenever it occurs. As you would expect,
the premium will be significantly higher than under a term assurance
and often subject to regular policy reviews the first of which
would normally be after 10 years. An unfavourable review could
result in an increase in premium but a favourable review could
result in increased cover at the same premium. Unless cover is
required to meet funeral expenses or an Inheritance Tax liability,
most people opt for Term Assurance on grounds of cost.
CRITICAL
ILLNESS COVER
As
indicated above, modern life assurance policies can also provide
cover against the occurrence of a Critical Illness. A policy which
combines life assurance and Critical Illness insurance may pay
out once, on the occurrence of the first insured event, and then
cease. This means that an insured person who suffers, say, a mild
heart attack could receive the proceeds of a critical illness
claim but then be left without any further life assurance cover
at a time when he/she has become uninsurable and the cover could
be needed most. Similarly, a claim under a joint lives policy
would leave the non-claimant spouse without cover. Consideration
should, therefore be given to separating the life assurance and
critical illness covers and to arranging individual rather than
joint lives policies.
Generally,
the younger you are the cheaper the premiums. There is something
to be said for taking out cover in your 20's when you least need
it on the basis that you will need it for some reason in the future.
By taking our cover at a young age and hopefully when you are
in good health you should have a policy which provides an excellent
level of protection for a relatively small premium!
HOW
MUCH COVER?
The
amount of cover selected may be determined by the amount of your
mortgage or loan. Where a policy is taken for family protection,
you should consider insuring for a capital sum of at least 10
times the salary which would be lost if you died. If you were
to insure for say £150,000 based on a salary of £15,000, your
spouse could invest the capital for income. But in today's low
interest rate environment, £150,000 would only produce an income
in the region of only £6000 per annum after tax!
TRUSTS
On
death, the value of a person's total estate, including the proceeds
of life policies not written in trust has to be calculated and
assessed for potential Inheritance tax liability. Once all outstanding
liabilities and taxes have been paid, the proceeds can be paid
out in the manner stated in the deceased's will. If there is no
will, the laws of intestacy apply and the estate may be distributed
in a manner which is not acceptable to the beneficiaries so a
Will is vitally important. Before an estate can be distributed,
a Grant of Probate must be obtained. This can lead to long delays
at a time when funds are needed the most.
In
order to avoid their becoming involved in any Probate delay, Life
policies should almost always be written under a suitable trust.
This ensures that the claim proceeds are not paid into the deceased's
estate, and can be paid relatively quickly for the benefit of
the nominated beneficiaries. We would be pleased to advise you
on putting your new life policy into a Trust. We offer this service
free to anyone taking out a life policy through our firm.