The benefit of a life assurance policy is that it guarantees that if a life-assured dies, the life company will pay out a cash sum. This money will be paid to the person paying the premiums or, if the sole life-assured has died, the proceeds will be passed into his or her estate and distributed according to the terms of the will. If there is no will, the sum will be handled according to the laws of intestacy. Life assurance policy.
It is recommended that life assurance policies be written under trust, as this will take the proceeds payable on death out of the estate, reducing the inheritance tax liability for the beneficiaries.
This is the simplest form of life assurance. Term insurance provides protection for a given period of time. At the end of the term (providing you have not died) you will not receive any money.
This is also the cheapest form of life assurance as there is no guarantee that a cash sum will be paid out, since nobody knows exactly when they will die. Life assurance for a person aged 30 will, on average, cost considerably less than for somebody aged 50, as the older client is far more likely to die within the term.
There are several options available with term assurance policies:
Renewable - on the end date there is an option to take out further term assurance without providing further evidence of health.
Convertible - at any time of the policy the term assurance can be converted to an endowment or a whole-of-life policy.
Decreasing - this term assurance is usually used to protect loan repayment such as a mortgage that reduces in value as the loan is gradually repaid.
Index-linked - the benefit level and the premium level increases in line with inflation or a set percentage each year.
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Family Income policies - this term assurance pays a regular income, usually yearly, instead of a single lump sum. This is to replace the lost income of the deceased.
These policies pay out the benefit whenever the life-assured dies. This means that as long as premiums are paid, a payout will be certain. Because of this, premiums are more expensive than for term assurance.
You can choose a fixed sum assured, or one that is linked to the growth of investment markets. Those that are linked in this way are either "with profits" or "unit-linked".
With-profits policies collect all the profits made (the surpluses on the funds of the provider company after expenses have been met) and then distribute a substantial amount of that profit in the form of bonuses. These are normally paid annually and, once they have been added, cannot be taken away. They offer a very safe investment, which tend to smooth investment returns.
Unit-linked policies are increasing in popularity and are linked to the investment funds of the life assurance company, the value of which can go down in value as well as up.
How much life assurance is sufficient?
Most people need life assurance, but it becomes vital if you have a partner and/or children. In the tragic event of a death, the remaining partner would have to support the children and maintain the payment of other overheads - e.g. the mortgage - although there is less income. Add to this the extreme emotional shock of death and it is easy to see just how important life assurance can be.
Most people do not have enough life assurance cover; this is mainly because they do not know how much they require. Naturally, the level of cover is partially dictated by how much you can afford, but think about this question: if scaffolding fell on your loved one's (or even your business partner's) head, killing them, how much do you think the scaffolding company should pay out due to their negligence?
If you work for a large organisation, you may have "death-in-service benefits". Do check what life assurance you currently have.
The longer you delay taking out life assurance, the more it costs. Also, the costs vary between different insurance companies. As a guide, look in the quality press or on the web, where you can find the cost for £1,000 of cover.
Be aware that life companies will "underwrite" the policy, which means that they may ask your GP for information. They may even want proof of your financial standing if you want high levels of cover.
If you arrange life assurance, you should consider writing the policy under trust. This will mean that the proceeds of the policy can be paid directly to your beneficiaries rather than into your estate.
This has two distinct advantages:
The proceeds will not be paid directly to your estate, which will be 'frozen' on death until probate is granted.
The proceeds do not add to any inheritance tax liability and can be used to pay any tax that is due.
Endowments are savings products that include life assurance. Endowments are a longer-term investment often taken out to run alongside a mortgage. At the end of the term, the endowment pays out accumulated returns. If the life-assured dies before the end of the term, the sum assured and any accumulated returns are paid out.
There are unit-linked and with-profits varieties that operate in the same way as for whole-of-life policies. An advantage of endowments is that the proceeds from a maturing policy are free of tax in the hands of the policyholder.
Permanent term life insurance
A "low-cost" endowment is a combination of a decreasing term policy and an endowment. The minimum sum assured continually decreases throughout the term to cover the outstanding mortgage debt. The growth in the endowment is expected to make up the difference. The overall intention is to add bonuses to the sum assured so that it grows to match, and perhaps even outgrows, the actual mortgage.
Low-start endowments offer the option to pay lower premiums at the start of a policy. They are attractive to those on a lower income now, who are likely to be more able to afford a higher premium in a few years' time.
Past performance is no guarantee of future performance, and the value of investments can go down as well as up.
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