Life Policies
The policyholder pays a regular or single premium and in the event of the insured’s death, his or her family gets a cash amount, generally many times the amount paid in premiums.
Because life assurance has been around so long, and because everyone should have some level of financial protection, more than 100 companies provide life assurance and protection policies. This makes for a competitive market which can only benefit consumers.
However, there are also many refinements on basic life cover, which provides a guaranteed death benefit if a claim occurs during the period of insurance. Life assurance can be set up for a specified period of time (term assurance) or for the whole of the insured’s life (whole of life assurance). There are many other protection policies designed to protect the insured and his or her family against other life events, such as illness, accident, disablement, redundancy and long-term unemployment.
The abundance of choice may seem like a mixed blessing. With so many options, making a decision could seem overwhelming. For a straightforward life assurance policy, you can try one of the web-based financial advice services that claims to come up with the best deal. You can find the services through an Internet search. You fill in details, such as age, medical details, gender, occupation, smoker/non-smoker and how much you want to insure your life for or somebody elses (if you have what is known as ‘insurable interest’ on their life). Hit ‘Enter’ and you know how much your premiums will be.
Life Assurance as a form of Savings
A variation is to use life insurance as a form of saving. You decide for how long you want to save and this often takes you to when your interest only mortgage needs to be repaid. At the end of the term you should receive a cash sum based on investment growth.
At the same time, if you die before the end of the term, the policy will pay out a guaranteed death benefit. These plans, known as endowments, can be issued on a with-profits or unit-linked basis.
With profits or unit linked?
If you invest in a with profits life assurance policy your premiums are pooled in a fund that has a wide spread of investments such as shares, bonds, property, gilts and cash. You may receive regular bonuses and a final bonus. Once they are added regular bonuses cannot be taken away. The final or terminal bonus, which you could possibly receive at the end of the term, depends on the health of the fund and there is an element of doubt as to how much you will get. That risk has been highlighted by endowments taken out to repay mortgages. Millions of homeowners who expected their endowments to cover their outstanding mortgage have been disappointed.
This misfortune resulted from investment growth assumptions being too high when the endowments were taken out. As a result, endowment backed mortgages are not as popular as they were previously.
If you already have an endowment or wish to invest in one, an IFA will be able to advice you on the financial strength of the provider (which is important) and whether the endowment is appropriate for your circumstances.
Another choice – life assurance bonds.
If you have ready cash, for instance from an inheritance, you can use it to invest in life assurance bonds. Single-premium life assurance bonds vary and can be unit linked or with profits. So, again an IFA will be able to help you pick the funds that are best placed to benefit you.
If you choose a unit-linked life assurance policy, you can choose what you want to invest in. The choice of funds is diverse – from cash funds to emerging markets. The price of units in unit-linked funds will go down as well as up so you really need to talk to an IFA who understands your investment risk tolerance.
Particularly for life assurance bonds and endowments there is no guarantee that you will get your money back when you cash in and it is important to remember that past performance is no indication of future performance.
Tax
Generally, whole-of-life assurance policies and term assurance policies are free of personal tax if you continue to pay the premiums for the stated period. It’s a great advantage. But you must check that your policy remains free of personal tax if you wish to change it. For instance, if you surrender early (except in the event of death) you may be liable for tax.
Life assurance products can be tax efficient in other ways, for example, if a single premium life assurance bond is put in trust for the future benefit of nominated beneficiaries, in the event of a claim the benefits are outside of the deceased’s estate and therefore free of inheritance tax. This is of particular use to anyone with an estate over the Inheritance Tax threshold of £312,000 (2008/2009) who wants his or her heirs to mitigate their inheritance tax liability.
What to watch out for
The personal finance pages of newspapers are full of warnings such as ‘Think before you act...such and such is a long-term investment.’ Such guidance applies to life insurance and other protection products. For endowments and life assurance bonds there is no guarantee that you will get your money back. For other protection policies there may not be a cash value at anytime.
That’s why it’s so important to plan ahead, receive unbiased advice and consider carefully all your financial options.
"Cooling off" period
If you buy life insurance when you have received advice then change your mind and would like to pull out of the purchase you have two weeks, or longer, to do so without loss. This cooling-off period is your statutory right. It is part of a raft of consumer protection laws.
How do you make the right choices?
It’s clear that choosing the right mix of financial protection is not simple, particularly when there are so many providers and products. Among the decisions you need to make are:
how much cover should I have?
for a specified term or for the whole of the insured’s life?
which protection policies should I have?
which fund is most suitable?
which provider is the most appropriate?
do I need critical illness cover and/or income protection?
