Guide to Life Insurance
What is Life Assurance?
Most of us have heard of Life Assurance and appreciate that it is a policy provided by a Life Assurance Company that pays out either a lump sum or a series of payments if or when you die. These payments are normally paid without the deduction of any personal income tax, and in most instances are actually tax-free.
It is however worth considering that any proceeds from a life assurance will be added to the deceased's estate. If this takes the overall estate above the nil band threshold for inheritance tax, this tax would be payable for any amounts in excess of the threshold. This can be avoided by placing the Life Assurance in Trust and therefore separating out these proceeds from the 'estate' and keeping them tax free.
The proceeds of a Life Assurance policy can be used:
- to pay off a debt such as a mortgage
- to provide an income for your dependents
You pay monthly premiums or an annual sum to the Life Assurance company for either a given time span or in the case of Whole of Life Assurance normally through to death (some Whole of Life policies have a maximum age limit on premiums).
Life Assurance policies can be combined with other forms of insurance, such as Critical Illness insurance so that you receive the lump sum if you are diagnosed with a specified critical illness or on death.
What types of Life Assurance are there?
There are four main types of life insurance:
- Term Assurance: The simplest form of insurance which pays out a lump sum if you die during the term of the policy. 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.)
- Family Income Assurance: this scheme can provide either an income for your dependents or a lump sum if you should die during the term of the policy. You should note that the income is only paid for the term remaining on the policy, so you may need to make additional arrangements to go on providing an income after the policy expires.
- Whole-of-Life Assurance: this type of policy is designed to pay out at the time you die, whenever that should be. As long as you maintain the policy there is a guarantee that, on your eventual death, the sum assured (level of Life Assurance cover) will be paid to your Estate.
- Endowment Assurance: Not only do endowments provide Life Assurance protection should you die during the term of the policy, but should you survive to the end of the policy term then you may also receive a lump sum. This lump sum is known as the maturity value. As there is an investment element within Endowments, higher premiums are required to provide for similar levels of Life Assurance protection than an equivalent Term Assurance or Whole of Life policy.
Premiums are usually paid monthly, occasionally annually but must be maintained in order to ensure cover remains in place. The premiums for Life Assurance policies vary depending on a number of factors, some of which are the type of Life policy you choose, your personal circumstances such as age and medical history, whether the premiums are guaranteed or reviewable. Also your choice of Life Assurance Company can have an impact on the level of premium required.
Pension plans - personal or occupational - sometimes include Life Assurance, which would be payable if you died before reaching the retirement age set within your pension plan. Often in the case of occupational pension schemes the cover is expressed as a multiple of salary. Known as Death in Service.
If your Life Assurance is arranged through an occupational pension scheme offered by your current employer, you must seriously consider starting a new policy, to replace the cover, if you leave your job. This is especially important, as an interim measure, should your new employer only provide Life Assurance protection once you have completed a period of time (e.g. a probation period).
What should I think about when selecting a Life Assurance policy?
Your first consideration should be the level of insurance cover you require. How much money might be needed in order to pay off your debts? How much money would your dependents need to continue to live with the same lifestyle they are currently enjoying? As a very approximate rule of thumb you should consider insuring your life for between 5 and 10 times your current salary.
You then must decide on the type of Life insurance you require; do you want a policy that pays out a lump sum or one that provides an income? Do you want cover for a specified term or to cover you indefinitely until you do die?
You are then ready to compare premiums and the various Life Assurance companies. You should also read the terms of the policy to check any restrictions.
If you have any questions about the type and level of cover that is best for you, please contact us. We will be pleased to help.
Can I have a policy where the lump sum changes?
Within the general definition of term assurance, there are a variety of policies.
- Level Term Assurance: the amount of life cover remains the same throughout the term of the policy and therefore when your personal circumstances change it is important that you ensure your cover is still adequate.
- Decreasing Term Assurance: the amount of Life Assurance protection decreases over the period of the policy, and makes this type of policy ideal for paying off or reducing debts which decreases over a period of time, such as a Repayment mortgage. It could also be used to cover a potential inheritance tax liability when used in conjunction with other inheritance tax vehicles.
- Convertible Term Assurance: you have the option, either during or at the end of the policy term, to convert to a Whole-of-Life policy or an Endowment Assurance, without having to provide revised details about your state of health (medical underwriting).
Convertible Term policies normally require you to pay slightly higher premiums than an equivalent level term assurance policy, as you are paying more for the option to convert it without the need for further medical evidence. This type of policy may be useful if you believe your health may deteriorate over a period of time.
Reviewable or Guaranteed Premiums?
The majority of Life Insurance companies will offer you two options when considering purchasing a policy and it is worth considering carefully.
Reviewable premiums are generally cheaper than Guaranteed premiums, however they will be subject to regular reviews by the Life Insurance company. The advantage of this is that the cost is lower in the early years when you are just starting out. Conversely it is likely that the premium will be increased at each review as the cost of life cover increases as you get older. This could mean that the revised premiums are ultimately more expensive than you can afford just at the time when it may be most necessary. At which time your options are narrowed to either reducing the cover (if the policy allows) or cancelling the policy.
Guaranteed premium rates ensure the premiums are guaranteed to remain at the initial levels for the duration of the plan (unless you choose to include an 'increase' option). The advantage of this is that it provides peace of mind because you can budget on a fixed premium although the initial premium is likely to be more expensive by comparison.
Can I have a joint policy that covers my partner and myself?
The simple answer to this question is YES. These are known as joint life policies, which will pay out if either of you should die during the lifetime of the policy.
Do bear in mind that the policy ceases once it has paid out on either you or your partner dying, and the cover will end.
If the second person is not your spouse then you need to prove that when you apply for the life assurance an 'Insurable Interest' exists – this means that their death would cause you a financial loss.
Why do I have to provide details about my health?
The Life Assurance company must decide whether or not you are an acceptable risk. If you or any members of your family have had a history of illness, they will want to check on your general state of health before deciding what premiums to charge for the insurance cover you require.
In most instances the Life Assurance company will be able to offer terms without the need for you to undergo a medical, although they do have the right to request an examination if they feel it is necessary. Just because they request a medical does not always mean they are going to charge you higher premiums.
If you have had any health problems, or have an unusual occupation or hobby, then in some cases, it is worth applying to particular companies, rather than simply the firm that appears to offer the cheapest rate. Please contact us – we would be happy to help.
What happens if I stop paying the premiums?
This does depend upon the type of policy you own. However unless you have an Endowment Assurance or a Whole of Life Assurance that contains an investment element then you are unlikely to receive a return of any of the premiums you have paid. Even in the case of Endowments or Whole of Life plans you may not get back all of the money you have paid to the policy.
In the majority of instances, if you stop paying the premiums to your policy, the Life Assurance cover will, after a given period of time, lapse (cease to be provided). If you wished to reinstate the policy at a later date then fresh medical evidence would generally need to be supplied to the Life Assurance Company before cover could be reintroduced.
For pure protection insurance, we offer products from a range of insurers.