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Life Assurance

 
Life Assurance is a relatively inexpensive product that pays out a capital sum (or income) upon the death the life that has been insured. If the life assured survives the term of the policy, nothing will be paid out, and the policy will expire without any cash value. See our life cover calculator to calculate a suitable amount of life cover to hold.
 

What can life assurance be used for ?

 
It hardly needs to be stated that people insure their lives (or other people’s lives) to provide for their families in the unfortunate event of early death, or to protect a mortgage, but there are many reasons why people take out life assurance policies.
 
  • To protect against the death of a spouse / child-carer (in this situation, alternative child care arrangements would have to be found and paid for).
  • To protect a loan / debt (other than a mortgage)
  • To insurance against a known future liability (such as an Inheritance Tax liability)
  • To protect shareholders or company directors against the loss of a key employee (such an event could leave the company extremely vulnerable. The introduction of protection through life insurance will reduce the impact on share values, giving shareholders a feeling of greater confidence.)
 
There are several varieties of life insurance.
 

Level Term Assurance :

 
This cover is commonly used for protection your family. If you die during the plan term, then the policy produces a tax-free lump sum for your dependants. The amount of life cover usually remains level over the plan term selected, although you can request that benefits increase in line with inflation as an optional extra.
 

Family Income Benefit :

 
These plans are commonly used for family protection. However, rather than producing a lump sum should you die during the selected term, the policy produces a regular tax free income for your dependants for the remainder of the plan term. The amount of 'income benefit' usually remains level over the plan term selected, although you can request that benefits increase in line with inflation as an optional extra.
 

Decreasing Term Assurance :

 
These plans are commonly used to protect a 'repayment' style mortgage i.e. where your debt to the lender reduces over the mortgage term. If you die during the mortgage term, the 'mortgage protection' policy produces a lump sum that is used to pay off the outstanding balance of your mortgage. Over the plan term, the amount of life cover reduces to match your outstanding mortgage loan - this helps keep the cost down as you are only paying for cover you need. This is usually the cheapest way of insuring your repayment mortgage.
 

Whole of Life Insurance :

 
Unlike Term Assurance, Whole of Life policies provide life assurance protection for life. Cover may either be provided for a fixed sum assured on premium terms established at outset or flexible terms are available which permit increases in cover once the policy is in force, within certain pre-set limits, to reflect changing circumstances.
 
As the name suggests, this policy remains in force for the whole of your life, but it differs from a pure ‘protection’ policy in that it also has an investment element. The split between providing life cover and investment is set at outset. It is possible to choose between:
 
  • Maximum cover – most of your monthly premium is used to provide life cover, and a small amount is used for investment.
  • Balanced cover – the monthly premium is split between life and investment, but this is initially a more expensive option, because the cost of the investment is additional to the cost of the life cover.
 
Essentially, when the investment part of the plan increases, the level of life cover insured can be decreased, as the investment element will be paid on death or when the plan is surrendered. Therefore, when you cancel a Whole of Life plan, there is likely to be a surrender value (the figure is dependent on how long the plan has been running).
 
For an even cheaper whole of life policy, there is the non profit policy, with a guaranteed sum assured payable on death, but no investment value.
 

MEDICAL UNDERWRITING

 
It is important to be aware that all insurance companies who issue protection policies (such as life assurance, critical illness and income protection) may require some form of ‘medical underwriting’. This means that the insurance company assesses the risks involved in offering cover to a specific individual. The basic purpose of a protection policy (such as life assurance, critical illness and income protection) is to cover the life of an individual. Additional benefits can be attached to an insurance policy in order to broaden its scope and effects (such as adding critical illness cover to a life assurance plan). And, in order to assess the risk for an individual’s life, insurance companies take into consideration many issues. Medical underwriting is one important aspect of evaluating the various health-related matters of assessing these risks. Medical underwriting or medical underwriters use a whole lot of information such as height, weight, medical history, family history, etc to assess the risks involved. Medical underwriters also gather information pertaining to various aspects such as diving, flying or any other forms of activity that is considered to be risky in nature. It also depends on the intake of alcohol or the number of cigarettes one smokes.
 
On the basis of the information provided, the premium, life cover amount and tenure of the policy is determined. In order to be absolutely thorough with the evaluation, the individual may have to go through a series of medical tests. This is usually the case when the sum insured exceeds a certain amount – as a rule of thumb, when the amount exceeds £250,000 – but as stated above, will be influenced by factors such as age, health and lifestyle. Generally speaking the greater the amount insured, the more extensive the medical underwriting becomes. Insurance companies will often seek a report from your GP, and may ask you to attend a medical examination. They may request this in one go, or may seek additional evidence based on findings from the first stage of underwriting. When the amounts insured become very large, such as £500,000 - £1 million and greater, the amount of medical underwriting needed becomes extensive. It is also advisable for an individual seeking to effect an insurance policy to undergo these medical tests, as it will provide the company with the requisite health-related information for accurate calculation of risk. The life assurance companies may offer a premium higher than those quoted in this report if they have reason to believe that the level of ‘risk’ they are assuming by offering you cover is greater than for an average person of similar age and in good health. Generally speaking, the higher the risk, the higher the premiums, and if an insurer feels that the risks involved in providing cover are too great (i.e. the individual is suffering severe ill health), they could decline to offer any cover. At this level of cover, whichever insurance company is used, the underwriters will require further details of John’s health before offering terms. This is likely to include a report from his doctor, and possibly any specialists that he may have seen. He is likely to be asked to undergo a full medical examination, including blood testing, urinalysis and heart monitoring. This may seem onerous, but it should be remembered that the insurance company is taking on a substantial level of risk, and they may have to seek approval from a re-insurer, their own insurer. The insurer will also want to verify the level of cover required by reviewing financial information about the business.
 
It could be possible that your employer provides you with some of these benefits as part of your employment package. Life Assurance (often known as Death-In-Service schemes), PHI and Medical Insurance plans are often provided at the employers cost, and employees are enrolled automatically. If you are unsure, it is worth finding out if any arrangements are in place. If one (or more) is in place, it is worth finding out exactly what is provided - as they could provide benefits anywhere on the spectrum from excellent to minimal; if the benefits are on the minimal side, it could be beneficial to supplement them with an additonal personal plan to cover any shortfall - just because an employers scheme is in place, it does not automatically mean that you would be provided with the level of cover that suits your personal needs.
 
If you wish to discuss the issue of protecting you or your family / partner / business against the serious consequences that illness or early death can bring along, we recommend that you seek independent financial advice.
 
NOTE: This document is intended to provide a brief overview of the subject. It should not be read as a recommendation to use any particular product, as it does not take into account individual circumstances and attitudes.
 
 
 

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