Topic 11 Flashcards
Life assurance
What is term assurance?
Term assurance is a basic form of life assurance that provides pure protection for a limited period with no investment element. It is typically the cheapest form of life assurance.
What are the key features of term assurance?
Key features include a sum assured payable only if death occurs within the specified term, no return of premiums if the life assured survives the term, no cash-in or surrender value, and the policy lapses if premiums are not paid within a certain period.
How is term assurance used in business situations?
Term assurance can be used for key person insurance to protect against the loss of profits due to the death of an important employee and partnership insurance schemes for buying out a deceased business partner’s share.
What happens if the premiums for term assurance are not paid?
If premiums are not paid within the due period (usually 30 days), the cover ceases, and the policy lapses with no value. Some companies allow reinstatement within 12 months if all outstanding premiums are paid and evidence of continued good health is provided.
What is the sum assured in term assurance?
The sum assured is the amount that will be paid out under the terms of the policy if the death of the life assured occurs during the term of the policy.
What is the life assured in term assurance?
The life assured is the person whose life is covered by the policy, and the policy will pay out if this person dies while the policy is in place.
What is the role of the policyholder in term assurance?
The policyholder is the person who owns the policy and pays the premiums. They are often the same person as the life assured.
What is the term in term assurance?
The term is the period for which cover is provided under the policy.
What is a surrender value in term assurance?
The sum payable by the insurance company to the policyholder if they choose to terminate the policy before the end of the term or before the insured event occurs. However, term assurance typically does not have a surrender value.
What is the difference between level term and decreasing term assurance?
In level term assurance, the sum assured remains constant throughout the term, and premiums are usually paid monthly or annually. It is often used for fixed-term debts or family cover. In decreasing term assurance, the sum assured decreases over time, and premiums may be paid throughout or for a shorter period. It is commonly used for mortgage protection.
How is decreasing term assurance typically used?
Decreasing term assurance is often used to cover the outstanding capital on a decreasing debt, such as a repayment mortgage. The sum assured decreases in line with the amount outstanding on the mortgage.
What is gift inter vivos cover?
Gift inter vivos cover is a term assurance policy designed to cover inheritance tax (IHT) liabilities on gifts made during a person’s lifetime. The sum assured is set to cover the tax due if the donor does not survive seven years after the gift, and the cover reduces over time based on tapering relief.
What happens to gift inter vivos cover after seven years?
After seven years, the gift becomes exempt from inheritance tax, and the cover ceases.
What is convertible term assurance?
Convertible term assurance allows the policyholder to convert the policy into a whole-of-life or endowment assurance at normal premium rates, without providing evidence of health. The conversion option is available while the term assurance is in force.
What are the restrictions on converting a term assurance policy?
The conversion must be done by canceling the term assurance and issuing a new policy. The sum assured on the new policy cannot exceed the original sum assured, and the premium for the new policy is based on the current rates at the conversion time.
What is increasing term assurance?
Increasing term assurance is a policy where the sum assured increases each year by a fixed amount or percentage of the original sum, typically used to account for inflation.
What is renewable term assurance?
Renewable term assurance allows the policyholder to renew the policy at the end of the initial term for the same sum assured without providing medical evidence, with a maximum age for renewal, usually around 65.
How is renewable term assurance different from renewable, increasing, and convertible term assurances?
Renewable, increasing, and convertible term assurances combine the benefits of renewable term assurance with the option to increase the sum assured by a specified amount on renewal and the option to convert to a whole-of-life or endowment policy.
What is family income benefit (FIB)?
Family income benefit provides a regular income to replace the income lost upon the death of a wage earner. It pays a tax-free income (monthly or quarterly) until the end of the chosen term, and beneficiaries can choose a lump sum equivalent to the discounted value of the remaining income payments.
What is whole-of-life assurance?
Whole-of-life assurance provides life cover for the entire lifetime of the life assured, paying out whenever death occurs, as long as the policy remains in force. It can be used for personal, business, and taxation purposes, such as protecting dependants, providing a tax-free legacy, or covering inheritance tax (IHT) expenses.
How are premiums for whole-of-life assurance paid?
Premiums may be payable throughout life or for a fixed term (e.g., 20 years) or a specified age (such as 60 or 65). If limited premiums are chosen, the minimum term is typically ten years.
Why does whole-of-life assurance have surrender values?
Whole-of-life assurance policies build up a reserve to ensure they pay out upon the death of the assured. This reserve allows life companies to offer surrender values, although they are generally small and in the early years, the surrender value will be less than the premiums paid.
What are joint-life second-death policies used for?
Joint-life second-death policies are used to provide funds to cover the IHT liability on a married couple’s or civil partners’ estate. The policy pays out when the second spouse/partner dies, as IHT becomes due only after the surviving partner’s death.
What is the benefit of writing a joint-life second-death policy under trust?
Writing the policy under trust ensures that the proceeds are used to meet the IHT liability and do not pass into the estate, which could make them liable for further IHT.
