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Life Assurance

Life Assurance

Introduction

Life cover plays a crucial role in financial planning but not everyone needs life cover. If an individual has dependents like a partner, children or other relatives and they depend on the individual’s income to cover the mortgage or other living expenses, then life cover should be considered to help dependents in the event of the death of the life insured.

Some lenders may insist that the borrower has a life policy in place to ensure the mortgage is repaid if the borrower dies. Assignment involves the policyholder signing over the benefits of the policy to the lender for the total term of the mortgage. The insurance company will then pay any proceeds to the lender if the policy matures or there is a death claim.

Assignment has become less common as there is an alternative where the borrower deposits the life assurance policy document with the lender. This means that the lender has no legal right over the policy however there is a ‘equitable right’ for the lender over the policy.

Types of Life Cover 

This section will discuss two types of life cover:

1. Term Assurance

2. Whole of Life Policy

The course previously discussed Endowments which are also a term-based life cover which have a surrender value but they are considered more of an investment.

Term Assurance

Term Assurance is considered a short term option compared to Whole of Life policies.

Term Assurance:

  • Only pays out the sum assured if a death claim is made within the policy term.
  • Does not have a cash-in value at any time.
  • Can be used for family and business protection, e.g. the provision of key person’s insurance.
  • The premium is not returned if the policyholder survives the term.
  • The cover ceases if the premium is not paid with a certain period after the due date (usually 30 days), however, most companies will allow reinstatement within 12 months if the outstanding premiums are paid and evidence is provided of good health.

If the policyholder doesn’t die during the term, the level term life assurance simply lapses, and a new policy will need to be taken out if they want further life insurance.

The premiums of Term Assurance tend to be cheaper than whole of life policies due to the reasons mentioned above. 

 

Premiums

Term Assurance Premiums:

  • Are either Single Payments, Annual or Monthly – The most common is monthly.
  • Stay the same throughout the term.

If the premium is not paid within 30 days, the cover ceases. However, some companies allow the policy to be restarted within 12 months; this would be subject to continued good health and missing payments being paid.

Key Terms

Life Assured – The person covered by the policy.

Sum Assured – The amount of cover provided by the policy (the monetary amount).

Surrender Value – An amount paid when cashing in an investment-linked policy early. 

Types of Term Assurance

There are several types of Term Assurance, but the two main types are Level Term or Decreasing Term.

Level Term Assurance

  • The Sum Assured and Premiums stay the same for the whole term.
  • Commonly used when a fixed sum is required on death to repay a loan.
  • Most commonly used for interest-only mortgages, or to provide family cover.
  • The amount of cover in real terms i.e. eroded by inflation.

Decreasing Term Assurance

  • The Sum Assured decreases during the term of the policy.
  • This type of policy is useful to cover a reducing loan, such as a repayment mortgage. It’s used to cover the reducing debt (also called mortgage protection assurance).
  • Lenders can arrange this on a block basis, usually with the monthly premiums added to the mortgage account.
  • This type of cover is cheaper than level term due to the cover reducing each year.
Life Assurance |

Mortgage Protection Assurance (MPA) or Mortgage Protection Policy (MPP)

These are decreasing term assurances designed to cover the amounts outstanding on a repayment mortgage.

  • Policies are sold with mortgages.
  • The sum assured is always the same amount as the outstanding amount on a repayment mortgage; this is based on a specific interest rate.
  • The policyholder can pay the premiums throughout the term or a specified shorter period.
  • The policy will pay out if the policyholder dies during the term.
  • Once the policy ends, no payment will be made.

Important Notes:

This policy should not be confused with a cover for mortgage payments due to an accident, sickness and employment, which is often referred to by a similar name. It’s important to note that this policy only pays if the policyholder dies during the term.

Convertible Term Assurance

  • Convertible Term assurance policyholders can change their term assurance policy into an endowment or whole life policy with up to the same amount of cover before the end of the term, without additional health questions. 
  • There is usually a cost to do this; typically it’s an additional 10% – 15% of the premium.
  • The term assurance must be in effect for the conversion to occur.

Once the conversion has been completed, the term assurance is cancelled, and a whole of life is setup. The sum assured will stay the same. If the policyholder requires an increase in the sum assured then this is subject to further underwriting and a new premium is calculated.

Pension Term Assurance

  • This is a form of level term assurance that was offered following the pension reform in 2006. 
  • Individuals that chose this policy between the 6th of April 2006 to December 2006 received tax relief on premiums – This relief still applies to existing policyholders.
  • This was a unique feature that allowed people to pay premiums from their gross income which made it tax efficient.
  • This was withdrawn in December 2006.
  • The insurance cannot extend beyond the individuals 75th birthday and the policy cannot be in joint names or assigned to a lender.

Whole-of-Life Assurance

Whole-of-life assurance pays out a lump sum when the policyholder dies, whenever that is.

Key Details:

  • The premiums are paid for the full term of the policy or for a limited period which is no less than ten years.
  • Mortality rates and investment returns dictate the premiums.
  • Some policies allow the policyholder the choice of adding insurance against specific illnesses or developing a disability.
  • A whole-of-life policy is designed to pay out on death whenever that is.
  • As the policy is guaranteed to pay out the sum assured at some point, the company must build up a reserve for the payouts.
  • Whole of life policies are not investment plans but protection plans and to reinforce this fact, the surrender value will be minimal in the early years of the policy.
  • Some whole life insurance policies only give you life assurance, while others are linked to an investment.

Whole-of-Life Policies can be used for:

  •  Protecting dependents against loss of financial support due to the death of the policyholder.
  • Providing a lump sum on death.
  • Funding additional expenses on death
  • Provide funds for paying inheritance tax.

 

Types of Whole of Life Assurances

There are various types of life assurance policies that will be discussed below.

Non-Profit

  • The amount of cover is set from the beginning.
  • The medical underwriting is taken at the beginning of the policy, and the premium is calculated based on this.
  • The premium is the same throughout the whole policy.
  • The sum assured is paid out upon death, whenever this may be.
  • The policy is very inflexible once setup.
  • The main disadvantage of the policy is that the sum assured may be eroded with inflation.
  • Ideal for situations where an absolute fixed amount is required – this is rarely the case though.

Full With-Profit Whole of Life Policy

  • The funds are invested in a life company’s with-profit fund.
  • The investment fund is made up of cautious investments; however, the policyholder has no choice in the investments.
  • Medical underwriting is done at the beginning of the policy, and the premium is calculated, which stays the same and is paid until death.
  • The sum assured is established at the start of the policy.
  • This policy is more expensive than a non-profit WOL.
  • Premiums are inflexible and set from the start.
  • Ideal for cautious investors

The main disadvantage of this type of plan is that the expenses are not transparent (implicit); this means that the holder will not know the true profit returns.

Reversionary Bonus – The reversionary bonus is any surplus profits made by the company which is given to the policyholder.  Once they have been allocated to a policy, they cannot be removed.

Terminal Bonus – The terminal bonus is paid on death, and this is usually a significant amount which is added to the final sum.

Low-Cost With-Profit Whole of Life Policy

  • This is a Low-Cost version of a With-Profits WOL. Essentially a cheaper version of the previous plan.
  • The guaranteed sum assured is set at a lower amount, and it’s expected bonuses over the life of the policy to equal to the required amount.
  • The plan has a guaranteed death benefit as it has a built-in temporary insurance to cover the short term bonuses that have not been paid yet. (Shortfall is made up with decreasing term assurance)
  • The policy gives maximum permanent cover at a low cost.
  • Premiums are fixed at the start of the policy and paid throughout the whole term.

Bonuses are added over time to build a sum equal to the required sum assured by the end of the policy term. Until the total sum assured and the bonuses are equal to the mortgage, any shortfall on the death of the life assured is made up by a decreasing term assurance. When the bonus and sum assured meets the mortgage amount, the decreasing term assurance element stops.

Unitised With Profit Whole of Life Policy

  • Similar to a Unit Linked plan with the stability of a with-profits fund.
  • Bonuses are added either by adding units to the policy or increasing the value of existing units.
  • The units will increase only and not decrease.
  • Life cover is paid by cashing some units to pay for the life cover.
  • a Market Value Adjustment (MVA) may apply if there is an early surrender of the policy.

Flexible – Unit Linked

  • Unit Linked WOL policies offer great flexibility, and they are often referred to as “Flexible Whole of Life Policies”.
  • The policyholder chooses a fund to invest in at the start, and the performance must be checked regularly as these are considered high-risk policies.
  • The policyholder also chooses an amount that they can afford to pay and the level of life cover.
  • The policy is flexible as the policyholder can choose the mix between life cover and the investment element.
  • Units are cashed every month to pay for the life cover, and the remaining units stay attached to the policy as the investment.
  • Has the option to take income and also insure an additional life.

Universal Whole of Life Policies

A Universal Whole of Life Policy is a unit-linked plan that offers more flexibility. The policyholder invests in a selected fund and each month units are deducted to pay for a wide range of benefits. Due to this, the policy is often referred to as a Menu Plan.

This is one of the most expensive policies, but it can be very useful if the benefits are required.

Benefits can include:

  • Income Protection Insurance (IPI)
  • Critical Illness Cover (CIC)
  • Accidental Death
  • Total and Permanent Disability
  • Medical and Hospital Cover
  • Guaranteed Insurability
  • Flexible Premiums.

Waiver of Premium

A waiver of premium can also be added on; this option pays premiums if the policyholder is unable to work due to an accident, sickness, unemployment or disability.

Exclusions from Cover

Insurers may not accept an applicant for life cover if they consider it a too great a risk, this could be due to:

  • Work – The applicant works in a high-risk job like the armed forces or working on an offshore oil platform;
  • Hobbies – The applicant has hobbies that are considered high risk such as hand gliding, rock climbing etc;
  • History of health issues – The applicant has a history of health issues like diabetes or cancer;
  • Lifestyle – The applicant has a lifestyle that presents a high risk such as smoking.

It’s important to know that insurers have different attitudes to risk and some insurers specialise in insurance for applicants with high-risk jobs or hobbies.

Excluded Circumstances

Insurers may not pay out if the insured person dies:

  • suicide
  • self-inflicted injuries
  • alcohol misuse
  • drug misuse
  • gross negligence (reckless act)

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