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Life Assurance
The purpose of life insurance is simply to provide money for people who financially depend on you. If there is no one who will be financially distressed by your death, life assurance is probably not essential, though there are other reasons why it could be useful.
The following are all situations that may require the use of life assurance.
Mortgage - if the house is to be lived in by your partner or children then it is normal practice to ensure that the mortgage is cleared on death.
Money for dependants - if you have small children then money will help provide for them, perhaps by allowing the surviving partner to stay at home or work part time for some years.
Business debts - banks and creditors get worried when key people die. Credit lines get shortened or even pulled, often with fatal consequences for the business. If you are a key person your business could insure you to provide cash flow to settle all debts and recruit a new person.
Business partners and co-directors - if you die you hope that your colleagues will pay a fair value for your share of the business, but they can only do this if the funds are available. Assurance can be used to provide this.
The following is a brief description of different types of life insurance:
Level Term Assurance
A fixed sum assured for a fixed period of time.
Increasing Term Assurance
The cover increases every year without the need for a medical. Not as popular as Level Term, but it should be as people may require additional cover in line with increases in their income and inflation.
Decreasing Term Assurance
The payout reduces over the cover period at a flat fixed rate each year.
Mortgage Protection Assurance
Life assurance where the lump sum reduces in line with the outstanding mortgage balance.
Renewable Term Assurance
A short term policy and therefore cheaper initially, and commonly used for protecting Company Directors. Importantly, it can be renewed without further medical evidence.
Convertible Term Assurance
A term assurance policy which provides the option to convert the plan, at the end of its term, to a different type of contract which can be a further term plan, an endowment or a whole of life contract.
Family Income Benefit Assurance
Instead of paying out a lump sum, this type of cover provides a tax-free annual income until the end of the term specified at outset.
Whole of Life Insurance
These policies pay out on death at any time as long as the whole life insurance policy is still in force. The premiums on the whole of life contract continue throughout your life or until the person whose life is assured reaches a certain age.
The main difference between whole life insurance and term insurance is that payment of the benefit will be inevitable. With term insurance, your premiums only go towards a mortality element, as it will only pay out if you die within the term. With whole of life, the premiums go partly towards a mortality element and partly towards a savings element, which builds up an investment fund in order to pay the benefit on death. Because of this, whole of life policies tend to be more expensive than term policies.
Trusts
Whatever policy you choose, you should always consider putting your policy in trust. Placing your policy in trust is important if, on your death, you wish the proceeds of your life insurance to be paid to your dependants in a straightforward manner. Placing your policy in trust should enable the money to be passed directly to your beneficiaries, without reference to your will. A suitable trust may also be key in avoiding the payment being subject to inheritance tax.
If you wish to discuss the above further or require information on any of our services, then please contact us.
Any reference to legislation and tax is based on FPP’s understanding of