Life Cover

1. Introduction to Life Assurance

What Is Life Assurance?

The main purpose of Life Assurance is to provide money for those people who may depend on you financially, in the event that something should happen to you. These people could include family members or business partners.

It can provide the reassurance of financial protection for you, your family and your business associates.

A Life Assurance policy pays out a sum of money when the person who is covered by the plan dies. The money is intended to pay off any outstanding debts and support your dependants financially by providing them with a further lump sum or a regular income if you die.
Even if there are no dependants who may be financially affected by your death, some Life Assurance policies could go towards covering funeral costs.

The type of Life Assurance and the amount of cover will depend on an individual’s particular circumstances and requirements. Factors to consider will include age, dependants, level of income and financial liabilities.

Premiums are normally paid to the insurance company either monthly or annually for a fixed period of time or in some cases, until death.

2. Types Of Life Assurance

While the overall concept of Life Assurance is fairly easy to understand, there are some complexities.

Most importantly, there are different types of Life Assurance products, covering Term Assurance, Whole of Life and others. However, because of the many options and flexibility, Life Assurance can be a powerful instrument in your financial planning toolkit. Please be aware that this type of assurance is based on an assessment of the health of the applicant.

The plan will have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse.

3. Convertible Term Assurance

Like Renewable Term Assurance, this type of term assurance contains an option at the end of the term. This time it is to convert it into an endowment or whole of life policy without the need for a medical. The option must be exercised before the plan ends. The level of protection cannot be increased upon conversion and, although your health is not taken into consideration at the time of conversion, the terms offered will be based on your age.

  • Option at specified dates to convert your protection-only policy into an investment type insurance policy based on your health at the time you took out the original term insurance.
  • The agreement requires that premiums are paid on time and that the insurer makes no changes except if a premium change is made for an entire class of policyholder
  • This option is of limited use.

Please be aware that this type of assurance is based on an assessment of the health of the applicant.

The plan will have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse.

4. Renewable Term Assurance

This type of Term Assurance gives you the option, at the end of the original term, to extend the policy for a further term, without the need for Medical Underwriting. The new premium will be based upon your age at the time you take up the option. This type of cover is initially relatively inexpensive, but the premium will be higher than for ordinary term assurance and could rise substantially at the time of renewal.

  • Allows you to extend the insurance term when it comes to an end
  • The premium you then pay is based on your health at the time you took out the original policy, even if your health has subsequently deteriorated
  • A useful variation for dealing with the unexpected, such as a child who stays in full-time education for longer than you had anticipated.

This could also be a good option if you cannot, at present, afford the level of cover you need for the period you require. You could take out the cover you need but for a shorter period and, at the end of the period, you could take up your option for a further period. Premiums would then be higher because you would be older, but there would be no additional charge even if you had developed health problems.

Please be aware that this type of assurance is based on an assessment of the health of the applicant.

The plan will have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse.

5. Increasing Term Assurance

This type of cover protects you for a given term for an increasing level of benefit. The amount of life cover chosen at the outset rises annually by a predetermined factor, normally Retail Price Index (RPI). This is known as “indexation”. The premium will also increase. By selecting indexation you are protecting the purchasing power of your selected benefit. This may be suitable for family protection although this would depend on individual circumstances and you should seek further advice.

  • works much like the level term insurance, except that the level of cover increases – and usually the premiums too.
  • worth considering if you are insuring for a long term, because increasing prices eat away at the value of a fixed level of cover.

Please be aware that this type of assurance is based on an assessment of the health of the applicant.

The plan will have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse.

6. Decreasing Term Assurance

The least expensive of the Term Assurances, Decreasing Term Assurance does what it says on the label. The level of benefit decreases as the term of the policy runs; the premiums do not however reduce. The premiums are fixed throughout the policy term, and the premium level is lower than that of Level Term Assurance as a result of the decreasing benefit. This type of life assurance is commonly used to protect Capital & Repayment mortgage debt. Typically the policy reduces the protection assuming a Mortgage Interest Rate of 10%. Many are paying mortgage interest at around 5% and, providing interest rates do not go over 10%, the benefit should reduce slower than the mortgage debt, ensuring repayment of the mortgage debt in full. However, there is no guarantee that the level of cover will match the outstanding debt upon a claim.

  • Provides a lump sum on death or terminal illness which can be used to cover outstanding repayments on a mortgage or loan
  • The level of cover reduces each year – in line with the sum you owe
  • If you die within the term of the policy, it will pay out a lump sum, to help clear whatever is outstanding on your debt at that point, however, there is no guarantee that the lump sum paid will enable you to clear your outstanding debt in full

Please be aware that this type of assurance is based on an assessment of the health of the applicant.

The plan will have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse.

7. Level Term Assurance

This type of cover protects you for a given term for a fixed benefit. The amount of life cover chosen at the outset will be paid whether a claim on death is made in the first year of the term or the last year. Quite often a payment would be made on the diagnosis of a terminal illness before the last 18 months of the plan, where you had 12 months or less to live. This type of protection may be suitable for family protection and Interest Only Mortgage debt, where the level of debt on the mortgage does not decrease as the years progress, however, this would depend on individual circumstances and you should seek further advice.

  • Provides a lump sum on death or terminal illness to help provide a financial buffer for your family or to pay off debts
  • The level of cover remains the same throughout the term of the policy
  • The policy pays out if you die during the term of the policy or if, before the last 18 months of the term, you are diagnosed with a terminal illness. (A terminal illness means you are not expected to live for more than 12 months)
  • Life insurance policies will only pay out once within the agreed time, so if the policy pays out because of a terminal illness claim, the policy and cover will end
  • Paying out on diagnosis of terminal illness may be proportionate to the level of cover under a death claim

Please be aware that this type of assurance is based on an assessment of the health of the applicant.

The plan will have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse.

8. Family Income Benefit

This cover will pay out if death occurs, and provides an income per year for the term remaining on the policy. For example, for a 20 year term, where the claim occurred after five years, there would be 15 annual payments made in total.

The payments are not normally subject to income tax but may impact some state benefits.