Category: Protection

Whole-of-life assurance policies provide financial security for people who depend on you financially. As the name suggests, whole-of-life assurance helps you protect your loved ones financially with cover that lasts for the rest of your life. This means the insurance company will have to pay out in almost every case and premiums are therefore higher than those charged on term assurance policies.

There are different types of whole-of-life assurance policy – some offer a set payout from the outset, others are linked to investments, and the payout will depend on performance. Investment-linked policies are either unit-linked policies, linked to funds, or with-profits policies, which offer bonuses.

Whole-of-life assurance policies pay a lump sum to your estate when you die. This could be used by your family in whatever way suits them best, such as providing for an inheritance, paying for funeral costs and even forming part of an IHT planning strategy.

Some whole-of-life assurance policies require that premiums are paid all the way up to your death. Others become paid-up at a certain age and waive premiums from that point onwards.

Whole-of-life assurance policies can seem attractive because most (but not all) have an investment element and therefore a surrender value. If, however, you cancel the policy and cash it in, you will lose your cover. Where there is an investment element, your premiums are usually reviewed after ten years and then every five years.
Whole-of-life assurance policies are also available without an investment element and with guaranteed or investment-linked premiums from some providers.

Reviews
The level of protection selected will normally be guaranteed for the first ten years, at which point it will be reviewed to see how much protection can be provided in the future. If the review shows that the same level of protection can be carried on, it will be guaranteed to the next review date.

If the review reveals that the same level of protection can’t continue, you’ll have two choices:

Increase your payments

Keep your payments the same and reduce your
level of protection

Maximum cover
Maximum cover offers a high initial level of cover for a lower premium, until the first plan review, which is normally after ten years. The low premium is achieved because very little of your premium is kept back for investment, as most of it is used to pay for the life assurance.

After a review you may have to increase your premiums significantly to keep the same level of cover, as this depends on how well the cash in the investment reserve (underlying fund) has performed.

Standard cover
This cover balances the level of life assurance with adequate investment to support the policy in later years. This maintains the original premium throughout the life of the policy. However, it relies on the value of units invested in the underlying fund growing at a certain level each year. Increased charges or poor performance of the fund could mean you’ll have to increase your monthly premium to keep the same level of cover.

Assured
A person or persons who are insured under the terms of a protection policy.

Convertible Term Assurance
A term assurance plan that gives the owner the option to convert the policy to a whole-of-life contract or endowment, without the need for medical checks.

Critical Illness Cover
Critical Illness Cover is an insurance plan that pays out a guaranteed tax-free cash sum if you’re diagnosed as suffering from a specified critical illness covered by the plan. There is no payment if you die. You can take out the plan on your own or with someone else. For joint policies the cash sum is normally payable only once, on the first claim.

Decreasing Term Assurance
A term assurance plan designed to reduce its cover each year, decreasing to nil at the end of term. Decreasing term assurance cover is most commonly used to cover a reducing debt or repayment mortgage.

Deferred Period
A period of delay prior to payment of benefits under a protection policy. Periods are normally 4, 13, 26 or 52 weeks – the longer the period the cheaper the premium.

Family Income Benefit 
A term assurance policy that pays regular benefits on death to the end of the plan term.

Guaranteed Premiums
This means the premiums are guaranteed to remain the same for the duration of the plan, unless you increase the amount of cover via ‘indexation’.

Income Protection
This insurance provides you with a regular tax-free income if, by reason of sickness or accident, you are unable to work, resulting in a loss of earnings. Income Protection is also known as Permanent Health Insurance (PHI).

Indexation
You can arrange for your insurance benefit and premiums to increase annually in line with inflation or at a fixed percentage. Premiums are normally increased in line with RPI (Retail Prices Index) or NAEI (National Average Earnings Index).

Insurable Interest
A legally recognised interest enabling a person to insure another. The insured must be financially worse off on the death of the life assured.

Joint Life Second Death
A policy that will pay out only when the last survivor of a joint life policy dies.

Key Person (Key Man) Insurance 
Insurance against the death or disability of a person who is vital to the profitability of a business.

Level Term Assurance
A life assurance policy that pays out a fixed sum on the death of the life assured within the plan term. No surrender value is accumulated.

Life Assured
The person whose life is insured against death under the terms of a policy.

Life Insurance
An insurance plan that pays out a guaranteed cash sum if you die during the term of the plan. Some term assurance plans also pay out if you are diagnosed as suffering from a terminal illness. You can take out the plan on your own or with someone else. For joint life insurance policies the cash sum is normally payable only once, on the first claim.

Long-term Care 
Insurance to cover the cost of caring for an individual who cannot perform a number of activities of daily living, such as dressing or washing.

Mortgage Protection
‘Mortgage life assurance’ or ‘repayment mortgage protection’ is an insurance plan to cover your whole repayment mortgage, or just part of it. The policy pays out a cash sum to meet the reducing liability of a repayment mortgage. You can take out the policy on your own or with someone else. For joint policies the cash sum is normally payable only once, on the first claim.

Paid-up Plan
A policy where contributions have ceased and any benefits accumulated are preserved.

Permanent Health Insurance 
Cover that provides a regular income until retirement should you be unable to work due to illness or disability. Also known as Income Protection.

Renewable Term Assurance
An ordinary term assurance policy with the option to renew the plan at expiry without the need for further medical evidence.

Reviewable Premiums
Plans with reviewable premiums are usually cheaper initially; however, the premiums are reviewed regularly and can increase substantially.

Surrender Value
The value of a life policy if it is encashed before a claim due to death or maturity.

Sum Assured
The benefit payable under a life assurance policy.

Term Assurance
A life assurance policy that pays out a lump sum on the death of the life assured within the term of the plan.

Terminal Illness
Some life policies include this benefit free of charge and this means the life insurance benefit will be paid early if you suffer a terminal illness.

Total Permanent Disability Cover
Also known as Permanent Health Insurance or Income Protection and sometimes available as part of a life assurance policy, this pays out the benefit of a policy if you are unable to work due to illness or disability.

Trusts
Many insurance companies supply trust documents when arranging your policy. Placing your policy in an appropriate trust usually speeds up the payment of proceeds to your beneficiaries and may also assist with IHT mitigation.

Waiver of Premium
If you are unable to work through illness or accident for a number of months, this option ensures that your cover continues without you having to pay the policy premiums.

Whole-Of-Life
Unlike term assurance, whole-of-life policies provide life assurance protection for the life of the assured individual(s). Cover may either be provided for a fixed sum assured on premium terms established at the outset or flexible terms which permit increases in cover once the policy is in force, within certain pre-set limits, to reflect changing personal circumstances.

Life assurance helps your dependants to cope financially in the event of your premature death. When you take out life assurance you set the amount you want the policy to pay out should you die, this is called the ‘sum assured.’ Even if you consider that currently you have sufficient life assurance, you’ll probably need more later on if your circumstances change. If you don’t update your policy as key events happen throughout your life, you may risk being seriously under-insured.

As you reach different stages in your life, the need for protection will inevitably change. These are some events when you should review your life assurance requirements:

Buy your first home with a partner
Have other debts and dependents
Get married or enter into a civil partnership
Start a family
Become a stay-at-home parent
Have more children
Move to a bigger property
Salary increases
Change your job
Reach retirement
Rely on someone else to support you
Personal guarantee for business loans

Your life assurance premiums will vary according to a number of different factors, including the sum assured and the length of your policy (its ‘term’), plus individual lifestyle factors such as your age, occupation, gender, state of health and whether you smoke.

If you have a spouse, partner or children, you should have sufficient protection to pay off your mortgage and any other liabilities. After that, you may need life assurance to replace at least some of your income. How much money a family needs will vary from household to household so, ultimately, it’s up to you to decide how much money you would like to leave your family that would enable them to maintain their current standard of living.

There are two basic types of life assurance, ‘term’ and ‘whole-of-life,’ but within those categories there are different variations.

Term assurance in its simplest form pays out a specified amount of life cover if you die within a selected period of years. If you survive, it pays out nothing. It is a cost-effective way of buying the cover you need.

Whole-of-life assurance provides cover for as long as you live. Since the policy must eventually pay out, it may build up an investment element that you can cash in by surrendering the policy. However, it could take many years for a surrender value to build up. A variation called a ‘maximum protection policy’ enables you to buy a higher level of cover at a premium that is initially lower. Whole-of-life insurance is also available without an investment element and with guaranteed premiums from some providers.

It makes sense to cover yourself until your normal retirement age, usually 60 or 65. However, if you have young children, you should cover yourself until they are financially independent, which usually comes after they have left school or university and are earning their own money.

Although the proceeds from a life assurance policy are tax-free, it could form part of your estate and become liable to Inheritance Tax (IHT). The simple way to avoid IHT on the proceeds is to place your policy into an appropriate trust, which enables any payout to be made directly to your dependants. Certain kinds of trusts allow you to control what happens to your payout after death and this could speed up a payment. However, they cannot be used for life assurance policies that are assigned to (earmarked for) your mortgage lender.

Generally speaking the amount of life assurance you may need should provide a lump sum which is sufficient to remove the burden of any debts and, ideally, leave enough left over to invest to provide an income to support your dependants for the required period of time.
The first consideration is to clarify what you want the life assurance to protect. If you simply want to cover your mortgage then an amount equal to the outstanding mortgage debt can achieve that.

However, if you want to prevent your family from being financially disadvantaged by your premature death and provide enough financial support to maintain their current lifestyle, there are a few more variables you should consider.

What are your family expenses and how would they change if you died?

How much would the family expenditure increase on things like childcare if you were to die?

How much would your family income drop if you were to die?

How much cover do you receive from your employer or company pension scheme and for how long?

What existing policies do you have already and how far do they go to meeting your needs?

How long would your existing savings last?

What state benefits are there that could provide extra support to meet your family’s needs?

How would the return of inflation to the economy affect the amount of your cover over time?