Life Assurance
Life Assurance pays out (usually a tax free lump sum), when you die.
The two main types are Term Assurance and Whole of Life Assurance.
Which is best, Term or Whole of Life?
If the need for life cover is for a fixed term such as while your children are growing up, or to cover a mortgage liability, then choose term assurance.
If the need may turn out to be longer, look at a longer term or go for a renewable or convertible term plan.
If the need is for the whole of your life - such as paying the inheritance tax bill on your estate when you die - then choose whole of life.
Buying Life Assurance
The first thing you have to decide is how much cover you want, taking into account what you may already have from various sources. As a rough guide insurance bought for family protection should have a sum assured between 6 and 10 times annual income.
Always consider writing your life assurance policies in trust. This means that when you die, the sum assured can be paid out straight away to your beneficiaries and will be outside your estate so will not attract inheritance tax (payable at 40 per cent on all assets over £250,000 in the 2001/2002 tax year). Most insurers will provide a simple trust wording free of charge, so there should not be any up-front legal charges either.
Making a claim under your life assurance policy
A death certificate will be needed, plus a grant of probate (or letters of administration in Scotland) so that the insurer knows who to pay. One advantage of writing a policy in trust is that a trustee's signature and death certificate is all that is usually required.
Types of Life Assurance
The two main types of protection Life Assurance are Term Assurance and Whole of Life Assurance:
Term Assurance
This only pays out if you die during the term of the policy. If you stop paying premiums, the policy just stops and has no value. There are lots of different types of Term Assurance:
- Level term. The sum assured stays the same throughout the term.
- Decreasing term. The sum assured goes down each year.
- Mortgage protection. The sum assured goes down each year in line with the outstanding capital on a repayment mortgage.
- Gift inter vivos, a special type of policy used to pay Inheritance Tax (IHT) if you die within seven years of making a large gift. The sum assured is designed to mirror the tax payable on the gift.Family income or family security benefit. If you die it pays a sum each year until the end of the policy term. Ideal for providing protection while your children are growing up.
- Increasable term assurance. Lots of term assurance policies are increasable, some go up in line with inflation or at a fixed percentage each year, while others allow you to increase the sum assured if certain lifestyle events happen such as having a child, getting promoted or moving home.
- Convertible term assurance. You can convert it, usually to a whole of life policy (see whole of life).
- Renewable term. At the end of the term you have the option to start a new policy for a similar term.
Whole of Life
A whole of life policy lasts as long as you do - the sum assured is paid out whenever you die. Unlike term assurance, whole of life policies build up cash values - although usually very slowly. You can buy a number of different types:
- Non profit. The sum assured stays the same throughout, although like all other policies, you may be able to increase the sum assured in line with inflation, by a fixed percentage each year or on a lifestyle event.
- With profits. The sum assured goes up each year as the insurer declares its annual bonus rate. In addition you (actually, your estate) may also be entitled to any special bonuses or to a terminal bonus on death.
- Unit linked. The sum assured may go up, depending on the performance of the units in which part of your premiums will be invested by the insurer.
- Maximum cover. This is like a term/whole of life hybrid. Your premium starts off low (almost as low as term assurance in some cases) then goes up usually after 10 years.
- Single premium whole of life. Usually an investment rather than a protection policy.
Add-on Benefits
Depending on the particular policy, you may be able to add on:
- Waiver of premium benefit. If you become ill or disabled for more than 3-6 months, the insurer will pay your premiums for you.
- Critical illness. Pays the sum assured if you suffer a specified critical illness or on death.
- Permanent and total disability insurance. Pays the sum assured if you become permanently and totally disabled.