Life Assurance

Why do I need life insurance?

Life assurance is important to ensure your loved ones can cope financially in the event of your unexpected death.  Life assurance may also be used to support business partners, who may also stand to lose if the worst happens.

Life assurance is often avoided by individuals who don’t wish to think about death, but is something that everyone would be wise to consider.

Reasons for taking out life assurance include:

• Mortgage repayments – Life assurance can pay off any outstanding balance on your mortgage in the event of your death
• Replacement income – Life assurance can pay out cash to family members, as a lump sum or as a regular income, to replace your lost income
• Childcare – Life assurance can cover childcare expenses where the primary childcare provider dies
• Education costs – Life assurance can cover school/university fees following the death of the policyholder

Which life assurance policy is best for me?

Life assurance policies come in a range of different formats, making it important to find the right policy at the right price for your personal circumstances

Different types of life cover

Life assurance is a policy that pays out a lump sum in the event of the policyholder’s death, with the purpose of protecting the policyholder’s family against financial hardship.

Life assurance is usually available on a single or joint basis, with benefits including paying out on the diagnosis of a terminal illness. If the policyholder is alive when the policy expires, no payment is made.  Also, if the policyholder stops paying premiums at any stage, the policy has no value, and again no payment is made.

There are several types of life assurance policy:

• Level term insurance - designed to pay out a sum of money if the policyholder dies during the policy’s term. The lump sum assured is guaranteed and remains unchanged throughout the term
• Decreasing term life insurance – this is where the sum decreases during the policy. It is regularly used to protect capital and interest repayments on a mortgage
• Renewable term insurance – On the expiry date there is an option for the policyholder to continue with the life assurance policy without a health review
• Convertible term insurance – This is effectively level term insurance with the option to revert to whole life or endowment insurance
• Increasing term insurance – Due to inflation the real value of money decrease every year. This form of insurance combats the fall in value of money with an escalating lump sum throughout the policy
• Index-linked term insurance – Some insurers provide the option for the premium to be increased each year in relation to the Retail Price Index.  These are a type of increasing term insurance, where the increase is linked to RPI

Pension term assurance

Following the announcement in the Pre Budget Report on December 6th Pension Term Assurance (PTA) is currently no longer available to new customers.

Endowment life insurance

These are the equivalent of saving schemes with life assurance attached. They are often carried with mortgages and will pay out any returns at the end of the policy term or a lump sum when the policyholder dies.

Family income benefit

This means that the payment on your death will be given to your family in regular payments rather than as a single lump sum. The term of the payments is agreed at the outset of the policy.

Additional benefits

When choosing a life assurance policy, you can often attach additional benefits at an extra cost, including critical illness cover and waiver of premiums.

Critical illness cover is payable on the conclusive diagnosis of a critical illness.

Waiver of premium is where your premiums will be paid by the policy underwriter if you are unable to work for health reasons.

‘Whole of life’ insurance

This guarantees the payout of a lump sum when the policyholder dies, at whatever time that may be as long as payments are maintained. The premiums and lump sum insured are guaranteed not to increase for the first 10 years of the policy. However, these policies are usually more expensive as a claim is guaranteed. They are available in various forms:

• Non-profit whole of life policies – A level premium payable throughout life, paying a fixed cash sum upon death
• With profit whole of life policies – Same as non-profit policies but the amount paid on death is the fixed sum, plus whatever profits have been allocated to the policy over the term
• Low cost whole of life policies – These have a guaranteed level of cover, that the amount payable on death is greater than the basic sum plus bonuses or the guaranteed death sum

Life assurance premiums

Life assurance policyholders pay premiums into a fund, from which all claims are ultimately paid out. There are two types of premium available – guaranteed and reviewable policies:

• Guaranteed premiums – The life assurance company guarantees to never increase your policy premium
• Reviewable premiums – You agree that the company can review your policy at set intervals, and adjust premiums as necessary. 

In general, the reviewable premiums are lower at the start of the policy, but, over time these premiums are likely to be increased by the life assurance company, and therefore the overall cost will surpass that of a guaranteed premium policy. Therefore, guaranteed premiums will generally work out as a better buy in the long run, but if you are on a tight budget, the reviewable premium may be a better short-term option.

Taking a risk

Life insurance is based on probability. Though unforeseen circumstances can cut life short, generally people will fulfill an average life expectancy and it is on this theory that life insurance companies can invest earnings and collect interest. However, for certain groups that probability is reduced and as such they are considered to be of a greater risk for life insurance companies. This could lead to higher premiums and, in some cases, even exclusions. Some of these greater risk groups include:

• High-risk occupations
• Dangerous sports/hobbies
• Poor medical history and people with an existing medical condition
• Smokers
• Over 60s – Any ten-year life insurance policy that takes you past the age of 70 would require advice from a regulated advisor with full FPC qualifications

Consequently, it is important to consider as many life insurance quotes as possible to find the best deal for you. It is also vital to disclose any information which may affect your risk rating because any omitted information can threaten any claim you make in the future.

Saving money

Taking out life assurance policies online can save cash as with most other financial products, as it cuts out the ‘middle man’. Here are some important elements to look out for:

• ‘Written in Trust’ – If your policy is written in trust then in the event of a claim this means that the money goes directly to the person you nominate. It also avoids your estate paying inheritance tax which could mean a 40% tax saving.
• Joint life insurance – This is normally written on a first death basis, meaning the policy pays out on the death of the first policyholder. It will save money but bear in mind that it will leave the second policyholder to potentially try and get a new life insurance policy at an affordable premium in old age. Overall it will work out to be more expensive in those circumstances.
• Critical illness – A life insurance policy with critical illness cover will work out much cheaper than two separate policies. Also remember to differentiate between critical illness and terminal illness cover. Most policies will automatically include terminal illness cover but the critical illness policy will pay out the lump sum for a range of illnesses with no life expectancy criteria.