Life Assurance
In it's simplest form Life Assurance pays a lump sum in the event of a death in return for a premium being paid. However in practice it becomes more complicated depending on the requirement for cover and any need for a trust, therefore please do not attempt to do it youirself, but contact us.
There are three main types (and many variations between):
Mortgage Protection
Mortgage Protection is a kind of Term Assurance specifically designed to repay, on death, during the term, the amount outstanding on a 'capital and interest' repayment mortgage. In other words, if the policyholder(s) die prematurely, the outstanding loan amount on the mortgage will be repaid in full.
Some policies have rider benefits, which are extra sorts of cover, added on to the principal life cover. Such benefits include:
- Waiver of premium benefit - the premiums are in effect paid for you in the event of defined incapacity due to illness;
- Income protection benefit - a percentage of your income is paid to you if you cannot work at your usual employment;
- Unemployment benefit - a variety of income protection benefit;
- Critical illness cover - the benefit is paid before death on the diagnosis of life shortening disease (e.g. cancer). This benefit may replace the death benefit, or it may be paid as well.
All these riders cost extra and are only paid subject to meeting tight criteria.
Term Assurance
Term assurance is generally the cheapest - and simplest - form of life assurance. You insure yourself for a set term - until a loan is paid off, for example. It doesn't contain any investment element - it simply promises to pay out if you die within the term. If you don't die within that time, you receive nothing.
Term policies can either be level or decreasing. A level policy simply means the sum assured remains 'level throughout the term of the policy. If you die on the first day of the policy, you get exactly the same sum as you would if you died near the end of the policy. A decreasing term assurance policy on the other hand, will pay out more at the beginning of the policy than it would at the end.
The way a term policy pays out can also come in one of two ways. Those that pay out a tax-free lump sum on death and those that pay a tax-free income to the end of the term, known as family income benefit policies. As usual there are pros and cons to both, a lump-sum policy can be more flexible because it allows your family to have a mixture of lump sum and income upon your death, but the income may be dependent upon investment returns at the time of death. A family income policy on the other hand is often cheaper because the liability is always decreasing for the insurer, for example, if you die in the 18th year of a 20-year policy, the insurers would only have to pay income for two years. It's also easier to work out the level of cover with this type of policy because you simply work out the income you would need to replace.
Whole of Life
Whole of life policies are designed to provide life assurance coverage for an individual's whole life, rather than a specified term. They contain a savings component, the idea of which is to build up a fund in the early years which will subsidise the life assurance cost in the later years. A fixed death benefit is paid to the beneficiary, this is either the sum assured or the value of the investment pot, whichever is the greater.
Premiums are usually fixed for the first 10 years of the policy, and each 5 years thereafter, after which the policy is reviewed and the premiums or the sum assured may need to be amended depending upon investment returns. Management fees also eat up a portion of the premiums.
Whole of life policies can be useful for some people to provide for an inheritance tax liability.
There are been many variations of these policies, both available now and in the past. Therefore it is essential that you take independent financial advice over what many may try to say is a simple matter. To do so contact us.
Life assurance quote here