Life Assurance

What is life assurance?
Life assurance policies pay out either a lump sum or a series of payments when a person dies during the life, or ‘term’ of a policy, usually to his/her dependants.

In most instances, these payments — known as the ‘sum assured’ — are tax-free. There are many reasons why life cover may be important for you. For example, the proceeds may be used to:

1. pay off a debt such as a mortgage
2. provide an income for your dependants
3. protect a business from the impact of a crucial partner dying
4. fund a savings plan for the benefit of your children

Payments to the life assurance company are made monthly or annually, and cover the policyholder for a pre-agreed term (because of this, most life assurance policies are referred to as ‘term assurance’ policies).

If the sum assured hasn’t been paid out by the end of the term, the cover will come to an end and the policyholder will get nothing back.

Life assurance policies can be combined with other forms of insurance, such as Critical Illness Cover, so that a lump sum is paid out if you are diagnosed with a serious illness rather than on death.

It’s worth pointing out that many pension plans (personal and occupational) have a life assurance element built into them, which would pay out a certain sum assured should you die before reaching the stipulated retirement age.

In the case of occupational pension schemes, the cover is often expressed as a ‘multiple’ of salary. Importantly, if your life assurance is arranged through an occupational pension scheme offered by your current employer, you must seriously consider starting a new policy to replace the cover if you leave your job.

This is especially important, as an interim measure, should your new employer only provide life assurance once you have worked for a certain period of time, i.e. during a probation period.

How much does life assurance cost?
The premiums for life assurance policies vary according to your personal circumstances, for example, age, medical history and your goals (see below).

Your choice of life assurance company can also affect premium levels: some will naturally be more competitive than others. Speak to an experienced financial adviser to ensure you are getting the best rate.

What should I think about when selecting a life assurance policy?
Your first consideration should be the level of insurance cover required. Ask yourself questions such as: how much money do I need to pay off all my debts? How much money do my dependants require to live the same lifestyle that they currently enjoy?

As a rule of thumb, you should consider insuring your life for between five and 10 times your current salary.

Once you have decided on the level of cover, you then must decide on the type of insurance required. Do you want a policy that pays out a lump sum or one that provides a regular income? Do you want to pay a little more and use your policy as a savings plan? Do you even want a plan that pays out irrespective of whether you die during the lifetime of the policy?

Once this has been established, you are in a position to compare the premiums required by the various life assurance companies. However, you should always read the terms of the policy to check any restrictions or exclusions contained within it, such as death caused by undertaking a hazardous pursuit.

Can I have a policy where the lump sum changes to meet my needs?
Yes. A large number of life policies are ‘term assurance’ policies, of which there are many different kinds. These are:

1. Level term assurance: the premiums you pay and the amount of cover you have remain constant throughout the term of the policy.
2. Decreasing term assurance: the amount of cover decreases over the term of the policy, although you continue to pay the same premiums. This type of policy could be used to pay off a debt that decreases over a period of time, for example, a repayment mortgage. It could also be used to cover a potential inheritance tax liability.
3. Increasing term assurance: the amount of cover and the premiums increase each year, generally in line with inflation. This type of cover can be used to provide an income for your dependants, as it is more likely to track the income they would require were you to die.
4. Convertible term assurance: at the end of the policy, you have the option to convert to a whole-of-life policy or an endowment assurance, without having to provide further details about your state of health. These policies normally require you to pay slightly higher premiums than a conventional level term assurance policy, and may be appropriate if you believe your health could deteriorate over a period of time.
5. Renewable term assurance: life assurance that pays out if you die within the period of protection, but which gives you the option to renew the cover at the end of the term without having to provide evidence of health (as long as you are not older than a certain age, e.g. 65). Although the premiums are likely to be higher, the life office will not be able to refuse you the new insurance.

Can I have a policy that covers my partner and myself?
Yes. These are known as ‘joint life’ policies, and they pay out if either of you should die during the lifetime of the policy. If the second person is not your spouse then you will need to prove that their death would cause you a ‘financial loss’.

Why do I have to provide details about my health?
The life assurance company must decide if you are an acceptable risk. If you, or any members of your family, have a history of illness, they will want to check on your general state of health before deciding what premiums to charge for the insurance cover you require.

In most cases, life assurance companies are able to offer terms without the need for you to undergo a medical, although they do have the right to request an examination if they feel it is necessary.

However, just because they request a medical does not necessarily mean they are going to charge you higher premiums.

When should I review my life cover?
It’s vital to review your life cover on a regular basis, but certainly when there are major changes to your life, such as the birth of a child, a marriage, a new job or home.

What happens if I stop paying the premiums?
This depends upon the type of policy you have. Unless you have an endowment policy or ‘whole of life’ assurance, which contain an investment element, you are unlikely to receive a return from any premiums you have paid. Even with endowments or whole of life plans you may not get back all the money paid into the policy.

In most cases, if you stop paying the premiums to your policy, then after a certain amount of time your life assurance cover will cease to be provided, i.e. your policy cover will lapse.

If, at a time in the future, you wished to reinstate the policy then fresh medical evidence would normally be required by the life assurance company before new cover could be offered.

For more information on life assurance policies, call one of our consultants on 0845 330 0809.