The right life insurance policies for you

Transcription

1 The right life insurance policies for you

2 THE RIGHT LIFE INSURANCE POLICIES FOR YOU Once you have chosen on whose life the policy should be taken out, how much money is needed and when and the best way to ensure that the right person or people get the money, you can then consider which type of life insurance policy to have. At first sight, this looks very complex but, like choosing a home or car, it is simpler if you understand the basic types. When it comes to life insurance, there are three main types: Term insurance pays if you die only during the term of the policy. Whole of life insurance pays whenever you die. Endowment insurance pays if you die during the term of the policy or at the end. Term insurance Level term Pays a fixed sum if you die during the term. Policies may also be renewable (can be extended at the end of the term) or convertible (to a whole of life or endowment policy), or both. Decreasing term As level term, but the sum insured falls each year. Mortgage protection As decreasing term, but the fall is in line with the outstanding capital on a repayment (or capital and interest) mortgage. The maths means that the higher your mortgage interest rate, the slower the outstanding mortgage capital falls each year. So, when it comes to choosing this type of policy, make sure the interest rate matches your mortgage (and will go on doing so if the rate rises in future), or that the rate is higher than the interest rate you expect at any time during your mortgage. Family income benefit This pays an annual sum if you die during the term of the policy and pays until the end of the term. So, if you died in year one of a 20-year policy, the annual sum would be paid 20 times; if you died in the last year, it would only be paid once. This type of policy can provide the highest initial cover for the lowest cost. Whole life insurance Whole life insurance simply lasts as long as you do. Premiums are usually more expensive than for term insurance because of the certainty that the sum insured will eventually be payable. Whole life is most valuable when the need for cover is permanent. To help keep costs low, insurers often offer: Reviewable premiums Premiums may be fixed for five or ten years only. Extra cover This means that the premium is artificially low initially but will rise later. The increase, usually after five or ten years, can be very significant. The most extreme example is a maxi cover policy offering the highest sum insured for the lowest initial premium but the biggest rise later (perhaps ideal if your income is low today but you expect it to rise swiftly in future). All Rights Reserved Page 1 of 3

3 Surrender values Because whole life policies are designed to pay out eventually, if you stop a policy early, the insurer may pay a surrender vale (or cash value) or convert the policy to paid up (the sum insured continues but is much lower and you stop paying premiums completely). To be able to offer lower premiums, some insurers no longer include surrender values as with term insurance, if you stop paying premiums, the policy simply then stops without value. Low start Premiums start off artificially low, then increase, usually every year. Insurers may also offer: With profits The insurer will declare a bonus dividend every year, which is added to the sum insured. Such policies are more expensive, but in effect the sum insured rises each year (though it is not guaranteed to do so that will depend on how well the insurance company performs and the bonuses it declares). Unit linking Similar to with profits, but premiums are invested into insurance funds, which will go up and down in line with the investments held and any income they may receive. Premiums limited to a particular age For example, 85 or 100. After that, the cover continues but no more premiums are paid. Endowments Traditionally, endowments were used to build up a cash sum at the end of the policy term, e.g. to pay off a mortgage. They also pay out on death during the term. Endowments are primarily savings plans, but also include life insurance. They tend to be used only for specialised purposes today, and are now rarely used to fund a mortgage. Add-ons Life insurers may also offer life insurance linked in with other types of protection. For example, an insurer may offer a term insurance that also includes critical illness insurance or income protection. You can find out more about these types of cover. Waiver of premium means that if you are unable to work because of illness or disability, the insurer will pay the premiums for you. There is an initial waiting or deferred period of three to six months after such an event occurs, and an extra premium is charged for this benefit. Many insurers will offer free trust wordings to enable you to leave the policy to beneficiaries on your death. We can advise you on how this might benefit you. Other useful terms There are some other phrases you may come across. Assurance or insurance? Technically, insurance covers things that might happen (such as dying in the next 20 years), whereas assurance covers something that will happen (such as dying eventually). Don t worry about the difference we simply use the term insurance to cover both. Reviewable or guaranteed Guaranteed premium rates are fixed for the whole term. Reviewable rates (which are cheaper) can be changed by the insurer, which will do so having taken account of factors such as life expectancy, investment returns and expenses. Reviewable rates will be cheaper initially and may remain cheaper, but there is a risk that they might go up in future and, especially at older ages, any increase could be significant. If that happens, you may have the option of reducing the sum insured as an alternative. All Rights Reserved Page 2 of 3

4 Increasable, escalating or index linked The sum insured will rise each year (or every three or five years) by a fixed amount, or in line with an index. The most common indices are the Retail Prices Index (RPI) or the Average Weekly Earnings (AWE). AWE usually rise faster than RPI, although this has not been the case in recent years. Increasable policies can help offset the effects of inflation. Where cover rises, the premium will usually rise more, because you will then be older. Guaranteed insurability This gives you the option to increase cover in future, up to a pre-set limit or limits, without new underwriting. Typically, it allows you to increase cover by up to 50% on marriage, moving home, birth or adoption of a child, promotion at work or on receiving a legacy. Rules vary from insurer to insurer, so it pays to check the small print. Inter-vivos This is a special type of decreasing term insurance that lasts for seven years. It is used in inheritance tax planning. Term 100 An alternative to whole life insurance, this runs to age 100. But some people do live longer than that! This guide is for general information only and is not intended to be advice to any speci recommended to seek competent professional advice before taking or refraining from taking action on the The Financial Conduct Authority (FCA) does not regulate tax advice, so it is outside the investment protection rules of the Financial Services and Markets Act and the Financial Services Compensation Schem represents our understanding of the law and HM Revenue & Customs practice as at April 2014, which are All Rights Reserved Page 3 of 3

5 Thank you for your interest in this Essential Guide. For further information or if you would like to discuss any aspect of the guide, please contact us. EA Financial Solutions Ltd 869 High Road Finchley London N12 8QA +44(0) All Rights Reserved