Life Assurance Flashcards
Term Assurance (General Desciption)
Term assurance pays a lump sum (or, in the case of family income benefit, a series of lump sums) on the death of the life assured. It has no element of savings or investment and it does not pay out on the life assured’s illness.
Under these contracts, the client decides initially on the number of years for which they require life cover and selects that term for the contract. Depending primarily on age and the term of the contract, the company then quotes a premium to be paid either monthly or annually. The older the life to be assured or the longer the policy term, the higher the premium.
If the life assured dies during the term of the contract, the insurance company pays the sum assured under the policy, but if the life assured survives until the end of the policy term the whole contract comes to an end. If that happens, the policyholder pays no further premiums to the insurance company. There is no payment from the insurance company in the form of a maturity or survival value.
A term assurance, therefore, is a policy which offers life assurance only, with no savings element whatsoever. This also means no surrender value if the policy is cancelled early. It usually offers the cheapest way to purchase pure life assurance where the need for cover is likely to last for only a certain length of time. The various types of term assurance include the following:
Level Term Assurance
This offers a level sum assured in return for a level premium throughout the term of the contract. There are a number of variations on this basic level, as discussed below.
Increasing Term Assurance
This provides for the sum assured to be increased regularly (without any evidence that the life assured is still in good health) over the term of the contract (for example, by 10% per annum), or alternatively offers the option to the policyholder to make such increases. For this variation on the basic term contract, the insurance company will charge higher premiums, which also increase as the sum assured increases. Such policies enable clients to ensure that their life assurance maintains its value in real terms against inflation.
Decreasing Term Assurance
These policies are designed to meet the needs of individuals with a decreasing liability on death, such as those with loans that are gradually being repaid. Individuals with a capital and interest repayment mortgage would use a variation on this type of plan, which has a profile that matches the way in which the outstanding liability reduces, known as a mortgage protection plan. As the amount of the loan is constantly being reduced by the borrower throughout that term, so the sum assured under the policy also reduces. The premium level remains the same throughout the term of the contract. The premium for a decreasing term assurance policy will be lower than that for a level term policy with the same initial sum assured because the cover lowers over time.
Family Income Benefit (FIB)
These are a special form of decreasing term assurance whereby, on the death of the life assured, the insurance company will make a series of regular annual or monthly payments, instead of one lump sum payment.
Renewable Term Assurance
This allows the client to effect a term assurance policy for, say, three or five years, at the end of which the client is then given the guaranteed right to effect a similar policy for a similar term of years without having to give the insurance company any evidence that they are still in good health. The short initial term of years means that premiums are very low, while the guaranteed ability to renew means that the client will not then be left without life assurance at the end of the term (assuming they take up the renewable option). Although premiums will be low for the initial term, the premium rates will increase with age each time a new policy is taken out under the option.
Convertible Term Assurance
This allows the policyholder to change the term policy into either an endowment policy or a whole of life policy with up to the same sum assured at any time before the end of the term of the original policy. This is a valuable feature if the policyholder’s need is for additional savings (convert to endowment) or a longer-term protection (convert to whole of life).
Endowment Assurance
Pure endowment policies pay a lump sum on the death of the life assured but these policies are primarily used as savings vehicles. Some schemes have the option of providing critical illness cover at the same level as the death benefit at extra cost. Endowment policies are not usually suitable as a means of providing a significant level of life cover where (as is usually the case) the client’s budget is limited. This is because the bulk of the premium is directed towards the savings element of the contract, leaving relatively little to provide the life cover.
Surrender values are likely to be non-existent or very low in the first one to two years.
Conversely, low-cost endowment products designed for use in home purchase have a higher amount of life cover (to match the mortgage loan) and a consequently lower savings element.
Whole of Life Policies (General Description)
Whole of life policies are primarily geared towards providing a substantial level of life cover, but some do have an element of investment. The balance between life cover and investment will depend on the policy type and options selected.
Whole of life policies offer the policyholder a guaranteed level of life cover for the lifetime of the assured. Although single premium policies are available, most policyholders pay a fixed regular premium for one of three main types of whole of life contract, as explained below.
As mentioned earlier, whole of life insurance written on a joint life last survivor basis can be used as protection to allow heirs to pay inheritance tax without reducing the overall estate.
Non-profit whole of life
This type of policy guarantees to pay a fixed amount of life cover on the death of the life assured, whenever it occurs. Although it has an investment value and will accumulate a surrender value over the years, it is likely to be relatively low or even zero in the early years of the policy.
With profits whole of life
A with-profits whole of life assurance policy guarantees to pay a minimum level of life cover (the sum assured) on the death of the life assured. The sum assured should increase each year as annual (reversionary) bonuses are added, and then on death, there is also the possibility of the addition of a terminal bonus. These additional bonuses can help the policy maintain its protection value in real terms. Because of the participation in the profits of the company, with-profits contracts accumulate higher surrender values but also have significantly higher premiums than non-profits contracts.
Flexible Whole of life/Unit linked whole of life
With this type of policy, the policyholder can choose between minimum and maximum levels of life cover for a stated premium. The lower the cover selected, the longer it can usually be guaranteed for. The initial amount selected can be changed at any time within the stated limits. The premiums paid by the policyholder purchase units in a fund of their choice offered by the life office. A range of funds will be available with different investment objectives. Each month, the life company calculates the cost of providing the life cover for the following month only and deducts this charge by cancelling sufficient of the units held to cover this expense. The policy value increases as the number of units held within it increases each month, and also as the value of each of the units increases, although there is no guarantee of this - the unit value fluctuates over time and could fall as well as rise.
Life Assurance Costs
- Whole of Life
- Convertible Term
- Term Assurance
- Decreasing Term - Family Income Benefit
