There are many forms of life assurance, some of which are mentioned in the adjoining pages to this section. Choosing the right one for you can depend upon a number of factors including tax, cost and the protection required. You can use the information and tools on this site to gain a basic understanding of what is available. However this information is only an overview. Only expert, independent advice following a full review of your circumstances will ensure you find a solution that provides peace of mind. Life assurance can be used to protect income, loved ones and businesses and, in certain circumstances, can be arranged in such a way as to minimise the effect of tax.
Whole of life assurance
Whole of life policies are designed to provide life assurance coverage for an individual’s whole life, rather than a specified term. They can contain a savings component however many on the market today provide protection only. The idea of the plans with an investment element is to build up a fund in the early years which will subsidise the life assurance cost in the later years.
A fixed death benefit is paid to the beneficiary for protection only policies. For plans with an investment element, the amount paid on death is either the sum assured or the value of the investment pot, whichever is the greater. It should be noted however that investment backed whole of life assurance contracts, are primarily designed to provide a lump sum on death and should not be viewed as a long term savings vehicle.
Premiums for investment linked plans are usually fixed for the first 10 years of the policy, and each 5 years thereafter, after which the policy is reviewed and the premiums or the sum assured may need to be amended depending upon investment returns. Management fees also eat up a portion of the premiums. Premiums for protection only policies can be guaranteed or reviewable depending on the terms selected at outset. Whole of life policies can be useful for some people to provide for an inheritance tax liability.
THE VALUE OF INVESTMENTS AND THE INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED
Term assurance is generally the cheapest – and simplest – form of life assurance. You insure yourself for a set term – until a loan is paid off, for example. It doesn’t contain any investment element – it simply promises to pay out if you die within the term. If you don’t die within that time, you receive nothing. Term policies can either be level or decreasing. A level policy simply means the sum assured remains ‘level throughout the term of the policy. If you die on the first day of the policy, you get exactly the same sum as you would if you died near the end of the policy. A decreasing term assurance policy on the other hand, will pay out more at the beginning of the policy than it would at the end.
The way a term policy pays out can also come in one of two ways. Those that pay out a lump sum on death and those that pay an income to the end of the term, known as family income benefit policies. As usual there are pros and cons to both, a lump-sum policy can be more flexible because it allows your family to have a mixture of lump sum and income upon your death, but the income may be dependent upon investment returns at the time of death. A family income policy on the other hand is often cheaper because the liability is always decreasing for the insurer, for example, if you die in the 18th year of a 20-year policy, the insurers would only have to pay income for two years. It’s also easier to work out the level of cover with this type of policy because you simply work out the income you would need to replace.