Life Assurance Guide
For many of us, life assurance can seem like a complicated business. That’s due in no small part to the bewildering array of terms that surround the topic: decreasing term assurance; whole-of-life; with profits; unit-linked; and so on. Add to that the fact that taking out life assurance by its very nature involves discussions and decisions about topics we generally don’t like to think about – our own death or that of a partner – and it’s no wonder that so many people would rather just avoid the whole issue.
However, taking out an assurance policy can form an important part of your medium- to long-term financial and life planning. This is particularly true when you’re buying a house; you are entering into a financial commitment in the order of tens or even hundreds of thousands of pounds, and it’s essential to consider making provisions for what would happen if you or your partner should die.
What is life assurance?
At its most basic level, life assurance is exactly what it sounds like: an insurance policy that pays out on the death of the named party. You pay a monthly premium to the insurance company, and if death occurs within the term of the policy, they pay out either a single lump sum or a regular income (usually paid annually).
You can take out a sole-name policy in your own name, in which case upon your death the policy payout will be made either into your estate or, if you write the policy “under trust”, paid directly to your beneficiaries avoiding inheritance tax liability.
It’s also possible to take out a policy and name the assured party as your spouse or partner, or even a business partner if you can show that a financial relationship exists. In this case, the policy will pay out to you upon the death of your partner.
Another option is the joint life policy, on which both you and your partner are named as assured parties. This type of policy can be either “first death”, in which case the policy pays out to the survivor when the first party dies, or “second death” (also known as “last survivor”), where the policy pays to the estate or beneficiaries only when both parties have died.
Types of life cover
When you’re looking at taking out life assurance, there are a number of different options available. Ben or one of his colleagues broker will discuss these with you in detail, but it’s always a good idea to do some research and gain a basic understanding of some of the terms involved.
One of the most common types of life assurance – and often the least expensive in terms of monthly premiums – is a “term assurance” policy. This provides cover for a fixed term, for example ten or twenty years, and only pays out if the assured party or parties die within the term of the policy. There is no investment element included in the policy, which means that if the named parties survive the term, the policy will not pay out.
Term assurance policies generally fall under either “level term assurance” – where both the premiums and the payout amount are fixed at the beginning and remain the same for the term of the policy – or “decreasing term assurance”, where the payout value of the policy reduces throughout the term. This may sound like an unusual arrangement, but decreasing term assurance policies are commonly used in connection with mortgages, where the intention is to provide life assurance protection that runs alongside the mortgage debt, which itself will reduce as it is repaid over the years.
The other major type of policy aside from term assurance is the “whole-of-life” policy. As the name suggests, this provides life cover for an indefinite period rather than a fixed term, effectively meaning that this type of policy will always pay out on death, no matter when it occurs. Whole-of-life policies tend to be either “with profits” – indicating that an annual bonus is added to the assured sum, effectively increasing the payout amount for each year the policy is held – or “unit-linked”, where the premium you pay includes an element that is invested in the insurance company’s investment fund. Like any stock-based investment, the value of the unit-linked fund can potentially go down as well as up.
Life assurance and your mortgage
When you take out a mortgage, it’s always a good time to consider your overall financial planning. Whether you take out your mortgage directly with a lender or use a mortgage broker, it makes sense to look at your life assurance options. For many people, this will involve taking out a decreasing term assurance policy linked to your mortgage repayment term. For others, a whole-of-life policy may be more appropriate to their financial circumstances.
It’s worth remembering that the cost of a life assurance policy may vary considerably depending on the type of policy you opt for, but other factors will also be taken into account, including such things as the age, gender, occupation and medical history of the assured party, as well as whether or not they smoke. By speaking to Ben or one of his colleagues, you can be sure of getting professional advice on the best policy to suit your own unique situation.
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