What are Life Assurance and Life Insurance Policies – and who needs them?
Life Insurance vs Life Assurance
First, it is important to understand the terminology and the difference between Life Insurance and Life Assurance.
Briefly, Life Insurance covers you IF you die within the ‘specified term’ of the policy i.e. between the specified start and end dates of it. It is effectively an agreement between a life insurance company and a policyholder, which states that in exchange for payments by the policyholder, the company commits to pay someone (the beneficiary), some cash, upon on the death of the person who’s life is being covered as long as death occurs within the ‘term’ of the policy. This means that once the policy ends, it has no residual value.
On the other hand, Life Assurance, while being a similar ‘agreement’ runs from the start of the policy until WHEN you eventually die i.e. it is not a fixed term cover. Life Assurance effectively offers long-term, tax-efficient, capital growth and results in a pay-out – hence it may be viewed as a good way of bequeathing cash to the next generation.
How much does it cost?
The amount of premium you pay for either type of cover will vary considerably and depends upon various factors including your age, sex, medical history and health status. For the reasons explained above, premiums payable in respect of Life Assurance products will generally be more.
Why take out Life Cover? Who needs it?
The answers to these questions are dependent upon your individual circumstances. For example, if you have no dependents, such as children or a partner who relies on you financially, it is possible that you do not need such cover. Alternatively, you may be retired, with children who have long since ‘flown the nest’ in which case you may also have much less need for cover than, for example, new couples, homeowners, young families and those with younger children.
Ultimately, most people take out life cover as a way of helping (protecting) their loved ones / dependents – ensuring that they will be able to cover bills such as household expenses, mortgage payments etc. once you are no longer around. Some people take out cover for when their children are young, choosing a policy end date which fits with when their family is likely to be financially independent, even if you have passed away. The variations are endless hence….
You NEED advice
Life cover is a complex area with numerous products and providers to choose from, hence it is essential that you seek help from an independent financial adviser who can provide the guidance you need. The adviser will help you understand how much cover you need, if any, and how long you need it for. He or she will also be able to consider what you are able to afford and come up with a good range of options for you. In addition, he or she will be able to give advice about whether you need to take out cover solely in your own name or whether joint names would be more appropriate.
Another factor to be considered is your ‘tax’ situation as many Assurance products are used for Tax Planning purposes (particularly as a means of protection against higher than necessary Inheritance Tax payments. With proper planning, the lump sum payable by an assurance policy can be received tax free.
Can you cash in this type of policy early?
As explained, these products are generally designed to pay out on death but some providers (not necessarily all) do allow you to cancel early, in which case you MAY receive the value of the fund – or what you’ve paid in, minus whatever ‘penalty’ charges the provider applies. These may be substantial, and this may well mean that early cancellation results in you ending up with less that you have paid in! Another reason for taking independent advice.
Variations on a theme…
As well as pure life cover, depending on the contract, other events such as terminal illness or critical illness can also trigger payment. Also, some life cover products also contain and element of investment – so you need to be CERTAIN you understand the nature of the cover.
A few ‘types’ of Life Cover
ASSURANCE
Whole-of-Life / Whole Life / Permanent Life cover
As the name suggests payment is made irrespective of when you die
INSURANCE
Term Insurance / Term Life Insurance
These products guarantee a pay-out if you die within a specific period
Decreasing Term Insurance / Mortgage Life Insurance
An option for those buying Term Insurance is to have the potential pay-out reduce year after year in line with the fact that the mortgage debt is likely to be falling as more is paid off. As you would expect, premiums will be lower than with ordinary Term Insurance
Increasing Term Insurance
Another alternative may be to have a policy which has pay-outs that rise each year, perhaps to reflect increasing inflation. Here, an ‘Index-linked’ policy will link the pay-out amount directly to a specific measure of inflation. If the cover rises each year, your premiums will inevitably be higher than for an ordinary Term cover or Reducing Term cover.
Renewable Term insurance
This type of policy provides cover for an agreed or ‘fixed’ period but allows for the period to be extended if required, probably without the need for further medical checks. Premiums may well increase as you age though. However, if you have been unfortunate enough to experience health issues since the original policy was taken out, these will likely not be considered in terms of cost if you choose to extend the policy.
Joint Life Insurance
If you are part of a couple, you may wish to take out a single policy which will pay out in the event of one of you dying and this may well be cheaper than taking out two individual policies. It should be noted though, that joint policies only pay out on the initial death and after that the cover ends.
Death-in-Service Benefits
This type of policy offers families a lump sum payment if a person dies while in the employment of a firm although the death does not have to be work related and nor need it happen at work for the cover to apply
Additional products
Last Survivorship Life Assurance, Endowment Life Assurance, Convertible Term Life Assurance, Group Life Assurance.
What is unlikely to be covered?
Murder, criminal activity, death under the influence of alcohol, death following the non-disclosure of smoking, death by participation in hazardous activities, death due to pre-existing health conditions, childbirth, natural disaster, suicide.
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