Life insurance?

If you are the main bread winner for your family, you might want to consider Life Insurance to make sure that they can cope financially should something happen to you.

Types of Life Insurance available.

There are two main types of Life Insurance Cover to choose from. The type of life insurance policy you take out will depend on your own personal needs.

• Term Insurance Life Policies
• Whole (of) Life Insurance policies

Whilst the above represent the two main types of Life Insurance, there are other more specifically tailored policies available depending on your needs and requirements:

• Endowment Life Insurance
• Critical Illness Insurance
• Key Person Life Insurance
• Mortgage Protection Insurance

All of the above offer differing cover and it is up to you to decide which best suit your needs.

As with most types of Insurance, the Life Insurance market is very lucrative for Insurance Companies so there are many companies to choose from.

Life Insurance policies can be confusing and we will help to clarify things a little - and if you are not sure about any of the 'jargon' used, then just refer to our Glossary of terms

Term Life Insurance provides a lump sum on death for a fixed premium, fixed amount of insurance and for a term of years that you decide. An example of this would be to take out a policy that paid out ?100,000 if you died within the next 20 years.  The sum assured will ONLY be payable on death, with no investment benefits nor payment on survival.

It is important to understand this concept. Should you survive past the end of the term, you will not receive any payment as your policy will expire. Should you stop paying the premiums at any time, cover will stop, and there is no surrender value. This is unless you pay extra on your premiums to have a waiver of premium so you can get a break from premiums should you lose your job. 

Types of Term Insurance Policies
There are various types of  Term Insurance Life Policies a quick description of each follows:

• Level Term Life Insurance  means that your premiums are set at a level at the beginning of the contract and do not move up or down. The sum assured will remain the same throughout the term as well, which is a disadvantage, as it will not take into account the effect of inflation.

• Increasing term insurance
  This is a fixed term policy where the sum assured will increase, either by a set percentage or by the Retail price index (RPI) throughout the policy term. Your premiums remain level throughout the term if the sum assured rises by a set percentage, or will rise according to the RPI if the sum assured does the same.

• Renewable term insurance
  This is policy lasting for a smaller period, usually five years, which can be renewed, although the sum assured cannot be increased, whilst the premiums will increase with age.

• Renewable increasable term insurance is the same as above but provides for an increasing sum assured.

• Convertible term insurance provides the option to convert parts of the sum assured to whole of life, endowment or further term assurance without further medical evidence.

• Decreasing term insurance is where the sum assured decreases over time; hence, the premiums are set lower. This is commonly used to cover a mortgage.  Mortgage Protection Life Insurance - Life cover for mortgage protection normally provides an initial amount of cover that is equal to the amount of the mortgage loan. The level of cover then decreases as the outstanding balance on your repayment mortgage decreases.

As always it is advisable to consider the implications of each type of insurance in terms of premium, returns and suitability for your needs carefully.

Whole Life Insurance policies

 With Whole Life Insurance Policies this is exactly the case, the policy insures an individual for the whole of his or her life with the total sum assured being payable on death.  There are various versions of Whole Life Policies designed to offer you complete choice and suitability.  In later life many people take out these plans as a way of paying for their funeral - a so called "funeral expenses plan".

 The three main types of Whole Life Policies are as follows:

• The 'With Profits' Whole Life Policy -provides a guaranteed sum upon death with an additional bonus. This bonus is provided by the insurance company adding what they term as a 'reversionary bonus', which is a percentage of the final sum assured. The level of this bonus will be determined by how well the insurance company has done with its investments. At the end of the policy the insurance company will add a 'Terminal bonus', which will reflect the performance of your life fund in the previous year to your death.
  
  Remember the performance of your fund is linked to the stock market and neither the reversionary or terminal bonus are guaranteed! Add to this that the insurance company does not have to disclose the performance figures of their investments. This means you are very much in their hands and if your family is not happy with the level of bonus received on your death they have very little to fight the insurance company with!
   
• Unitised Whole Life Policy - Unlike the 'with profits' policy, this policy offers you a guaranteed minimum sum or the choice of taking the value of a 'with profits' policy if this provides you with a greater sum. As this is linked directly to Stock market investment, it will be clear the level of profits (or losses) you can expect. There is also the choice of death cover, maximum, standard or minimum. If having agreed to say the maximum death cover, you can change your level at any time during the life of he policy.
   
• Non Profit Policy - This is the cheapest of the Whole Life Policies as there is no investment part to this policy. You will have a guaranteed sum payable upon death but obviously this will not keep pace with inflation.

Endowment Life Insurance
With most Life insurance policies you will only collect the sum assured upon your death which whilst good for your surviving dependants does not help you with investments or savings. However there is a product, the Endowment Life Policy which offers you the best of standard life policies but has the incentive that if you survive the policy you still collect at the end of your agreed term. As with all things there is a downside and in his case it is that you can expect premiums to be markedly higher than standard life policies.

The Endowment Life policy is not just a source of protection but it has also become a recognised source of savings and investment. These policies have two main investment options. Here is a summary of their main points:

 With Profits

• Share in profits made by insurance company's investments
• Amount of profits & bonuses are not guaranteed
• A means of long-term saving with minimum risk
• Potential for a good return

 Unit Linked

• Your premiums are invested & managed by the insurance company
• Sum insured is not guaranteed unless in the case of death
• Amount payable under policy is linked to the value of the investments
• The potential for a great return but is higher risk

There are also other optional extras available to most policies, which include waiver of premium and Critical Illness Cover.

The waiver of premium is sometimes included within your policy or it is available at a small extra charge. By having this benefit you will have your premiums paid for you if you are unable to pay your premiums owing to long-term illness or accident. Usually, there is a waiting period before you can receive this benefit, so it is well worth checking your cover details.

It MUST be remembered that like all policies which use investments Endowment Life Insurance policies are all linked to the performance of the stock market, which can go down as well as up. The levels of returns you can expect on your policy are therefore not guaranteed.

It is advisable to consider the implications of each type of insurance in terms of premium, returns and suitability for your needs carefully.

Critical Illness Insurance Cover
A critical illness is specified as an illness that would stop an individual being able to work and so receive an income. This does not mean that the illness is incurable but that will incapacitate individual for a length of time. Critical Illness Insurance will pay out a lump sum on diagnosis of any of the specified illnesses covered by the policy and 'here in lies the rub'. Each insurance company will maintain it's own list of critical illnesses and you will only be covered for those that are on your policy's list.

You can take out Critical Illness cover in two ways, firstly as a stand alone policy or as an add on to a Whole Life Insurance Policy, Term Insurance Policy or Endowment Policy, thus covering you for most eventualities.

The premiums of Critical insurance policies are determined by the following criteria:

• Your Age
• Your family history (most critical illnesses tend to be hereditary)
• Whether you smoke?
• The level of cover you require.

The last point is probably the hardest to work out, but take time to consider what your financial commitments are and what would need to be covered.

Key Person Life Insurance Cover
If you run or are part of the management of a small firm, you will be very aware of the importance of key individuals to the running and success of that firm. If one of those key players dies of succumbs to a critical illness the ability of your firm to continue running may well be irretrievably effected.  For this reason the insurance industry has created a number of Life Insurance Policies specifically tailored to cover small businesses in the event of such problems arising. These policies can cover the business, the partners or even the shareholders.

Key Person Life Insurance Cover pays the firm an agreed sum in the event of death or critical illness of a key member of staff. This money can then be utilised as the management of the company sees fit. The benefit can even be used to support the spouse of the effected party, which of course is outside the normal trading remit of the company.

Such insurance policies can also be used by privately owned companies to cover major shareholders. This will enable the board to maintain control of the company by insuring the value of the major shareholders holding, thus allowing the company to buy back that holding in the event of disablement or death of the major shareholder. This type of policy is known as Shareholder Protection Assurance.

This form of insurance is also available to partnerships covering any or all of the partners.

Key Person policies are quite complicated, mainly because they will be designed to reflect the specific nature of each individual business. We would therefore recommend that a specialist advisor be contacted so as to ensure that any policy taken out is effective as well as being tax efficient.

Mortgage Protection Life Insurance
For most people the biggest investment that they will make is in their house. Again for most people their house will be their home, the place where they will bring up their families, the place in which they may live in retirement or even use to fund their retirement.

• If you have a mortgage on your house, what would happen to it if you died?
• Would your dependants be able to keep up the payments?
• If not, then they would ultimately lose the house.

To cover you against this eventuality there is Mortgage Protection Life Insurance.

For Repayment Mortgages:
The outstanding value of your mortgage decreases as you pay off the mortgage each month. A lot of Companies offer special Mortgage Protection Policies to cater for this situation. They are referred to as "Decreasing Term Insurance". The level of cover automatically decreases as your mortgage is repaid. In addition it is the cheapest form of life insurance. Please remember that most building societies & mortgage companies recommend or even insist that Mortgage Protection Insurance is taken out.

For Interest Only Mortgage:
With this type of mortgage the amount outstanding remains constant as you only pay off the interest each month. In this regard you will need to take out a savings scheme that will provide a sufficient sum to pay off at the end of the term. In the event of death, you need to take out a "Level Term Insurance" which finishes on the date you are due to repay the mortgage.