Life Cover
Term (non- investment)
Term insurance is the cheapest form of protection and it can offer high life insurance cover for a low premium. This can be ideal if you have a limited income. Cover can usually be arranged to cover just one person, but in some cases cover will also be available for spouses/partners in the same policy.
There are different types of term insurance:
Level Term – You are insured for the same amount throughout the agreed term.
Renewable Term – You have the option, after a specified period (usually 5 years) to take out a further term policy without the need for any further evidence of health, providing the policy will not continue beyond a certain age (often 65 or more).
Convertible Term – You can convert the policy to a whole life (see below) or endowment (see below) insurance without giving further evidence of your state of health. If you decide to convert, the new policy will usually cost the same as a normal whole life or endowment policy based on your age at the date when you exercise the option. If you have a young family and a limited income these policies might be best. Not only do they provide cheap life cover at the outset, but they give you valuable options in later years if your income has risen or your health has declined.
Decreasing Term – The sum insured reduces by a fixed amount each year, decreasing to nil at the end of the term. The premium will normally stay the same throughout the term.
These policies are usually used to cover a mortgage or other loan as they pay any outstanding balance of the debt if you die early. They can also protect a liability to Inheritance Tax on gifts to others (see Taxation below). Remember, though, at the end of the term nothing is payable and there is no surrender value.
Increasing Term – The sum insured and premium increase each year by a fixed percentage of the original sum insured. These policies are designed to increase your insurance protection as your earnings increase.
Pension Term (non-investment)
Family Protection (non-investment)
Family Income Benefit – If you die during the term of the policy a regular income is paid to your dependants for the rest of the term. The income can be paid monthly, quarterly or yearly. Some policies provide an income which increases each year at a fixed rate – say by 3% or 5%.
Whole of Life (Investment linked)
This pays the sum insured whenever your death occurs. Whole life insurance is not limited to a specific period like term insurance. Premiums are usually more expensive because it is certain that the insurance company will eventually pay the sum insured. With some policies you will have to pay the premiums until you die, but with others you may not have to pay premiums any more once you reach a chosen age – say 65 or 80 - but the insurer will pay the sum insured when you die. In these cases the policy is then known as “paid up”. Whole life insurance can be arranged with or without profits or can be unit-linked.
Endowment (Investment linked)
Endowment Insurance
This both protects your family and saves for the future. Although dearer than protection insurance alone it will help your family’s finances should you die, while at the same time it is a method of long-term saving. Endowment policies can be issued on a with-profits or unit-linked basis (see below). You pay premiums for an agreed number of years say 10, 15 or 20. At the end of this time you receive a lump sum, which is either the sum insured together with bonuses in the case of a with-profits policy, or - with unit-linked endowments - the lump sum is the return of all money invested together with the investment growth. If you die before the maturity date the insurance company will pay the sum insured, or the value of the policy at that time if greater.
Unit-Linked Policies
With a unit-linked policy there is no guaranteed sum insured payable except in the case of death. The insurance company invests your premiums in specific funds chosen by you. The amount payable under your policy depends on the value of the investments in those funds at the time your policy matures. Insurance companies offer a range of different funds to which your policy can be linked. You should ask for an explanation of the different funds so that you understand the different risks and opportunities.
There is no guarantee of the value of the sum to be paid on maturity. The potential benefit from a unit-linked policy can be greater than from a with-profits policy. But of course there is also the risk that the eventual benefit could be lower. The value of investments can fall as well as rise.
