4: The Range And Application Of Life Assurance Flashcards
What is a ‘rider benefit’?
These are additional benefits that can be added on to a protection policy, these include:
* Waiver of premium
* Terminal illness
* Accidental death
* Total and permanent disability cover
* Guranteed insurability opitions
* Optional benefits - such as, fracture cover, second opinion services, mental health support
Whole-of-life assurance - What? Common uses?
What?
* * Covers the life assured for their whole lifetime
* It pays out he amount of cover (the sum assured) upon death, so long as premiums have been upheld.
* It’s the most expensive option, so must be the length of term must be justified.
Common uses
* Provided financial protection for self and dependants
* To protect the value of the estate from IHT
* Protecting loss of pension on death
Premium structure for WOL
They may be:
* Level - remain the same throughout life
* Indexed - allows the benefit and premium to increase each year
Whole of life - Current Policy types
Non-profit/guaranteed
* Fixed premium for a fixed sum assured
* Commonly referred to as guaranteed whole-of-life
* Does not involve the uncerainty of premium reviews (which were present in previous investment style products)
Whole of life - old style policy types
Older styles of WOL included an investment component
With-profit
* Potential to receive additions to the sum assured through bonuses
Unit-linked
* The sum assured would depend on the value of underlying investment units
* Usually there was a guaranteed minimum amount
Unitised with-profit
* Combined with-profit and unit-linked styles
Low-cost
* Sum assured was made up of a combination of decreasing term and a with-profit element
What is a surrender value?
The amount of money a policyholder receives if they decide to terminate or “surrender” an insurance policy or investment before its maturity or before a claim is made
Surrender value on investment-style WOL plans
Companies used to offer a surrender value to clients that stopped investment style policies before death.
The values were small in relation to the sum assured, and typically be less than the premiums paid.
This emphasises the fact that whole‑of‑life policies are protection policies and not investment plans.
Guaranteed whole‑of‑life policies - What is it? How are premiums charged?
Main points
* Premiums and sum assured stays the same throughout lifetime of the policy
* Premiums can be paid monthly or annually
* Price of premiums depends on factors including sex, age, health and occupation
* Some providers offer indexation - whereby premiums and sum assured increase in line with inflation
* Does not have a surrender value
Uses and benefits of whole‑of‑life policies
- to protect dependants against loss of financial support in the event of the death of an income earner
- to provide a lump sum on death
- to fund additional expenses on death
- and to provide funds for the payment of IHT.
How should a life assurance policy be arranged if the goal is to help provide funds for a IHT liability?
- Joint-life, second death, or
- Last survivor
Term assurance - What? Common uses?
A life insurance contract that pays a lump sum upon death of the policy holder (life assured) during a specied term
* Pure protection - no investment element
* can be from a few months to more than 40 years
* No Cash or surrender value
* Premiums are paid monthly or annually (though single premiums are also allowed)
* Premiums are normally level (though the sum assured can vary - decreasing)
Uses
* Commonly used to cover mortgage liability
* Can be used personal, family, and business
* Business use include KPI/partnership/shareholder insurance
What happens if the life assured survives the term? (term assurance)
- Policy ceases
- No return of premiums
What happens if premiums are not paid within a certain period after the due date (normally 30 days)? Term assurance
- Cover ceases, policy lapses with no value
- Most companies will allow reinstatement within 12 months so long as still in good heath and gap in premiums paid
Level term assurance - What and uses
Sum assured remains constant throughout the term
Uses
* Commonly used to cover a constant-fixed term debt - interest-only mortgage
* Family used - cover until children leave home
Decreasing term assurance - What, different types?
Sum assured decreases, usually by equal amounts, throughout the term
* Level decreasing
* Family income benefits (FIB) policy
* Mortgage protection assurance
* Giftinter vivos policy
* Increasing term assurance
* Pension-based life cover
* Convertible term assurance
* Renewable term assurance
Level Decreasing term assurance
Level Decreasing
* Cover decreases at a fixed rate throught the term
* Used to cover the outstanding capital on a debt that reduces by a fixed amount each year
Family income benefits (FIB)
Form of level decreasing term assurance
Uses
* Replace income lost on death of income earner
* Provides income rather than a lump sum
* Might pay out tax-free regular income from death until end of term
* Alternatively, a lump sum can be paid at a discounted value
* Policies may be arranged to pay esculating amounts to battle inflation
Mortgage protection assurance
Decreasing term assurance to cover the outstanding balance of a repayment mortgage
- Sum assured is calculated in a way that it is always equal to the amount outstanding based on a specified rate of interest
Gift inter vivos policy
inter vivos means a gift made during the donor’s life
* Inter vivos policies are designed to cover the IHT on PETs
* Sum assured remains level for 3 years, then decreases in line with the taper relief for PETs
* only effective when the Nil-rate band will be exceeded
Increasing term assurance
Sum assured increases each year by a fixed amount or by a percentage of the original sum assured.
Underwriting for an increasing term assurance will be based on the maximum (final) sum assured rather than on the initial cover.
Uses anticipate growth in funds needed:
* Inflation protection
* Family growth
* loan/mortgage repayments
* estate panning
* Business protection
Convertible term assurance
Term assurance with the option without additional underwriting to be converted into a Whole-of-life policy or endwoment
* Usually an extra 10-15% on premiums for this option
* Usually only included on level term assurance plans
* The sums assured on the new policy cannot exceed the sum assured of the original convertible term assurance
Renewable term assurance
Term assurance with the option to renew the policy for the same sum assured without further medical evidence
* Can only be actioned at the end of the term
* The new term will be the same as the previous
* Often there is a maximum age in which it can be renewed (usually 65).
* The premium for the new policy is based on the life assured’s age at the date when the renewal option is exercised.
Renewable and increasable term assurance
Similar to a renewable policy, but can also increase the sum assured by a set amount - usually either 50% or 100%
* Without the need for extra health details.
How to mitigate potential IHT liability with a life assurance policy?
- Whole-of-life, joint life, second death, assurance
- Gift inter vivos policy - specifically to cover IHT bill on a gift made where NRB has already been used
- Ensure that the sum assured is paid into trust
A known sum is required given a specific timeframe. What is suitable? Examples of this scenario.
Level term assurance - For interest only mortgages or for family protection until children leave home.
Decreasing term assurance - To cover the outstanding mortgage balance on a repayment mortgage.
Family protection - considerations
Level term assurance will pay a set amount as a lump sum.
Where replacing income is concerned it may be beneficial to look at family income benefit
- Family income benefit premiums are a form of decreasing term assurance, and the premiums will be less than level term assurance.
- The lump sum benefit from a level term assurance requires careful management.
Waiver of Premium (WoP) - What is it?
Designed to ensure the policy payments are maintained and benefit preserved if the insured is unable to work owning to accident, illness, or disability.
* Rider benefit - additional benefit to the main policy
Terminal illness cover - What is it?
Option to accelerate payment of death beenfit on a life policy where the life assured has a short life expectancy - typically, under 12 months.
* Rider benefit - additional benefit to the main policy
Accidental death benefit - What is it?
Option to pay a multiple of the sum assured if death occurs as a result of an accident.
* Rider benefit - additional benefit to the main policy
Total and permanent disability cover - What is it?
Similar to terminal illness cover; enables an accelerated payment of th death benefit should the insured become permanetly incapacitated and unable to work
* Providers will vary on definitions
* Rider benefit - additional benefit to the main policy
Guaranteed insurability options
Allows the sum assured to be increased without the need for medical underwriting
* Option may be available at a set point in the term or;
* On certain events, such as increasing a mortgage, marriage, or birth of a child.
