topic 11 - life assurance Flashcards
Term assurance
- Most basic form of life assurance
- Pure protection for a limited period with no element of investment
- Can be either personal or family protection and also for a wide range of business situations
key features of term assurance
- Life insurance in its cheapest form
- Sum assured is only payable if someone dies during the term assured
- Terms can be anything from a few months to years
- If they survive the term, then cover ceases and there’s no return of premiums
- If premium is not paid within a certain period cover ceases and policy lapses with no value
- Premiums normally paid monthly or annually, although single premium also allowed
Level term assurance
- Sum assured remains constant throughout the term
- Premiums normally paid monthly, annually or sometimes single payments can be made
- Used when a fixed amount is needed on death to repay a constant fixed-term debt
- Also used to provide family cover – eg pay be used until children finish education
Decreasing term assurance
- Sum assured reduces to nothing over the term of the policy
- Premiums may be payable throughout term or limited to a shorter period
- Could be used to cover the outstanding capital on a decreasing debt (eg a mortgage)
Gift inter vivos cover
- Using a gift inter vivos policy, the sum assured is set at the outset as the amount of tax that is due.
- reduces in line with the tapering relief on taxation of gifts.
- After 7 years the cover ceases as the gift becomes exempt from tax
Convertible term assurance
- Includes an option to convert the policy into a whole-of-life or endowment assurance, at normal premium rates, without the life assured having to provide evidence of their state of health at time of conversion
Renewable term assurance
- Includes an option to renew the policy at the end of the initial term for the same sum assured. Without need for further medical evidence
- There is a maximum age, after which this option is no longer available
Increasing term assurance
- The sum assured increases each year by a fixed amount or a % of the original sum assured
- Used when temporary cover of a fixed amount is required but the cover needs to increase to take account of inflation
Family income benefit
- Designed to provide a regular income to the replace the income lost on death.
- Usually, a tax-free regular income from the date of death until the end of the chosen term.
- Cover usually reduces with time. However, policies can be arranged with escalating instalments, but the premiums are higher
Whole-of-life assurance
is designed to provide protection rather than investment
- To cover the life assured for the whole of their lifetime
- Used in personal and business situations:
o Protect dependants against loss of financial support
o Provide a tax-free legacy
o Cover expenses on death
o Provide funds for the payment of IHT - Will definitely pay out sooner or later, unlike term assurance
Non-Profit Whole-of-life assurance
Fixed level of life assurance in return for payment of a fixed premium
With-Profit Whole-of-life assurance
fixed minimum level of cover to which bonuses are added to reflect investment profits
Low-cost Whole-of-life assurance
- Promise a certain level of cover
- Provided by the combination of with-profits and a decreasing term assurance
Unit-linked Whole-of-life assurance
- Units are issued to the plan holder
- Minimum level of cover is set at outset which is increased when the value of the units held rises above that amount
- In strong market conditions, is most likely to allow early repayment of a mortgage
Unitised Whole-of-life assurance
Issues units with a guarantee unit prices will either never fall below a certain level or will increase by at least a stated minimum amount
Waiver of premium
No premiums are payable if the life assured is unable to work as a result of accident or sickness
Endowment policies
- Combine life assurance and savings
- Unlike whole-of-life assurance, endowment runs over an agreed term
- If death occurs during term, the sum assured is paid out, while if the plan runs for the full term and matures an investment value if paid out.
Non-profit endowment
- Has a fixed sum assured, payable on maturity or on death
- Return is fixed and guaranteed
Full with-profits endowment
o Usually a higher fixed premium
o Entitles policyholder to share in profits of the life assurance company
Low-cost with-profits endowments
o A low-cost endowment overcomes the high premiums of a full with-profits policy by having a sum assured that is payable on death
o The basic with-profits sum assured is lower than the mortgage amount needed to be funded, so full repayment is not guaranteed at maturity
o Bonuses are added over time to equal mortgage amount. But during this time any shortfall on death would be made up by a decreasing term assurance
Unit-linked endowments
o When a premium is paid, some of this is used to purchase units in a chosen fund.
o A pool of units gradually builds up and at the maturity date, the policyholder receives an amount equal to the total value of all units added to the policy
o Can provide a fixed benefit on death before end of term, by cashing in units monthly from this pool.
Unitised with-profits endowments
o Combines the security of with-profits policies with the great potential for reward offered by the unit-linked approach
o Unit prices increase by the addition of bonuses
o The value of the policy is held until death or maturity
