Designed to protect the most important people in our lives, Life Assurance is one of the most important aspects of financial planning. Without it, your plans for a secure future for your family can be ruined.
The most common reasons for taking out life cover are the ability to provide a lump sum/income to your family in the event of your death or to repay a specific debt such as a mortgage.
There are numerous different ways to protect your life and it is important to take advice from a professional as the differences in products and costs from various sources can be baffling.
A ‘term’ plan is designed to pay the benefit if the insured event occurs within a certain period of time (the term of the plan). Historically, the benefit has been the ‘guaranteed sum assured’ payable in the event of the death of the life assured.
Types of cover available are:
Most commonly used general purpose life cover.
A level term plan is one where the sum assured remains the same throughout the term. The sum assured will only be paid should death occur during the term. At the end of the term the plan will cease. This plan is suitable where someone needs a fixed amount of money to pay a debt within the term.
Generally used for mortgage protection.
A decreasing term plan is one where the sum assured reduces each year until, at the end of the plan, it decreases to zero. It is generally used in conjunction with a repayment mortgage (or similar loan) where the amount of debt is reducing, so the amount of life cover needed to protect it is also reducing. It is often set up to reduce in line with such a debt.
Other than being used for mortgage repayment another example of this would be a gift inter-vivos plan, which is designed to cover any outstanding inheritance tax payable by the donor on potentially exempt transfers which are above the nil rate band.
Family income benefit
More cost effective than term assurance.
On death, rather than the sum assured becoming payable as a one-off lump sum, it is paid out in instalments. The instalments would be paid until the end of the original term of the plan. For example, if the plan was set up to run for 10 years and the life assured died after 4 years, the instalments would be paid for a further 6 years.
This plan is suitable where individuals want their dependants to receive a regular income on their death, rather than a lump sum (maybe because they aren’t used to handling capital sums).
Whole of Life policies
Frequently used for Inheritance Tax protection, Whole of Life plans are ‘permanent’, i.e. they pay out the benefit whenever the life assured dies, rather than within a specific term. Whole of Life plans pay the guaranteed sum assured whenever the life assured dies (or, in some cases, in the event of a critical or terminal illness).
Other variables of term plans:
A convertible term plan allows an individual to “convert” the plan, without any further underwriting, into a plan offering a more permanent form of life cover, at any time during the term (normally whole of life plans but can also be an endowment). They are more expensive than non-convertible term plans.
Frequently used for business protection, a renewable term plan allows an individual to extend their plan for a further term, once they reach the end of the original term. Again, this is allowed without further underwriting, so is particularly useful to those individuals whose health deteriorates. Again, the sum assured will be limited to what it was on the original term and an individual’s contribution will reflect their age and sex at renewal.
These are term assurance plans where the sum assured increases automatically during the term of the plan, for example, on every plan anniversary, they help protect the sum assured against the effects of inflation and maintain it’s real buying power.
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