Term of Life Insurance

Protection for a specified fixed period of time

With a term life insurance policy, you choose the amount you want to be insured for and the period for which you want cover. This is the most basic type of life insurance. If you die within the term, the policy pays out to your beneficiaries. If you don’t die during the term, the policy doesn’t pay out and the premiums you’ve paid are not returned to you.

There are two main types of term life insurance to consider: level-term and decreasing-term life insurance.

Level-term life insurance policies
A level-term policy pays out a lump sum if you die within the specified term. The amount you’re covered for remains level throughout the term, hence the name. The monthly or annual premiums you pay usually stay the same too.

Level-term policies can be a good option for family protection, where you want to leave a lump sum that your family can invest to live on after you’ve gone. It can also be a good option if you need a specified amount of cover for a certain length of time, for example, to cover an interest-only mortgage that’s not covered by an endowment policy.

Decreasing-term life insurance policies
With a decreasing-term policy, the amount you’re covered for decreases over the term of the policy. These policies are often used to cover a debt that reduces over time, such as a repayment mortgage.

Premiums are usually cheaper than for level-term cover as the amount insured reduces as time goes on. Decreasing-term assurance policies can also be used for Inheritance Tax planning purposes.

Family income benefit policies
Family income benefit life assurance is a type of decreasing term policy. However, instead of a lump sum, it pays out a regular income to your beneficiaries until the policy’s expiry date if you die.

You can arrange for the same amount of your take-home income to be paid out to your family if you die.

 

Guaranteed financial protection that lasts for the rest of your life

A whole-of-life insurance policy is designed to give you a specified amount of cover for the whole of your life and pays out when you die, whenever that is. Because it’s guaranteed that you’ll die at some point (and therefore that the policy will have to pay out), these policies are more expensive than term insurance policies which only pay out if you die within a certain timeframe.

Paying Inheritance Tax 
Whole-of-life insurance policies can be a useful way to cover a future Inheritance Tax bill. If you think your estate will have to pay Inheritance Tax when you die, you could set up a whole-of-life insurance policy to cover the tax due, meaning that more is passed to your beneficiaries. To ensure the proceeds of the life insurance policy are not included in your estate though, it is vital that the policy be written in an appropriate trust. This is a very complicated area of estate planning, and you should obtain professional advice.

A whole-of-life insurance policy has a double benefit: not only are the proceeds of the policy outside your estate for Inheritance Tax purposes, but the premium paid for the policy will reduce the value of your estate while you’re alive, further reducing your estate’s future Inheritance Tax bill.

Different types of policy
There are different types of whole-of-life insurance policy: some offer a set payout from the outset, others are linked to investments, and the payout will depend on performance. Investment-linked policies are either unit-linked policies, linked to funds or with-profits policies which offer bonuses.

Some whole-of-life policies require that premiums are paid all the way up to your death. Others become paid-up at a certain age and waive premiums from that point onwards.

Some whole-of-life policies (but not all) have an investment element and therefore a surrender value. If, however, you cancel the policy and cash it in, you will lose your cover. Where there is an investment element, your premiums are usually reviewed after ten years and then every five years.

Whole-of-life policies are also available without an investment element and with guaranteed or investment-linked premiums from some providers.

Reviews
The level of protection selected will normally be guaranteed for the first ten years, at which point it will be reviewed to see how much protection can be provided in the future. If the review shows that the same level of protection can be carried on, it will be guaranteed to the next review date.
If the review reveals that the same level of protection can’t continue, you’ll have two choices:
• Increase your payments
• Keep your payments the same and reduce your level of protection

Maximum cover
Maximum cover offers a high initial level of cover for a lower premium until the first plan review, which is normally after ten years. The low premium is achieved because very little of your premium is kept back for investment, as most of it is used to pay for the life insurance.

After a review, you may have to increase your premiums significantly to keep the same level of cover, as this depends on how well the cash in the investment reserve (underlying fund) has performed.

Standard cover
This cover balances the level of life insurance with adequate investment to support the policy in later years. This maintains the original premium throughout the life of the policy. However, it relies on the value of units invested in the underlying fund growing at a certain level each year. Increased charges or poor performance of the fund could mean you’ll have to increase your monthly premium to keep the same level of cover.

Leave a Reply