Term Assurance
What is Term Assurance?
How Much Cover should I have?
Variations of Term Assurance
Additional Options
Should the benefits be written under trust?
How much does life cover cost?
What is Term Assurance? (top)
TERM ASSURANCE is a type of life insurance that provides a lump sum on death within a specified period. The sum assured of a level term policy remains the same for the duration of the period selected. Level term insurance provides temporary protection and does not build any cash value.
Many level term insurance policies are sold with guaranteed premiums that never increase during the term of the policy. However, some policies don't provide a premium-rate guarantee and the insurance company can raise the premium during the specified term. Premium increases are intended to account for the rising probability of the insured's death in any given year.
The premium amount charged for a level term insurance policy will vary, depending upon the particular insurance company and the applicant's unique circumstances. Certain lifestyle choices, health conditions, and occupations may cause the insured to be charged higher premiums. In some cases, insurance applications may be rejected because of health problems or other risk factors. However, there are some insurance companies willing to insure higher-risk applicants at special premium rates.
How Much Cover should I have? (top)
The amount of cover you should provide is dependent upon your individual circumstances. It is sensible to provide sufficient capital in the event of premature death so that the dependents are left free of any debts and with sufficient income or lump sum to enable them to maintain their current standard of living.
In reality, choices have to be made between the desirable level of cover and the affordable amount given all the other expenditure one faces. As a rule of thumb financial advisers tend to recommend a sum of 10 times the annual salary for a typical family man.
Variations of Term Assurance (top)
LEVEL TERM provides a consistent amount of cover throughout the term of the policy and these policies are usually used to cover an interest only mortgage, or to provide a lump sum to the dependents so that it can then be used to generate an income.
Under DECREASING TERM the sum assured reduces each year, deceasing to nil at the end of the term. The cover can reduce by a fixed amount each year, or in line with the outstanding balance of a repayment mortgage, to match the reducing debt.
FAMILY INCOME BENEFIT is designed to provide a regular income over a preselected term. This is a particularly useful cover to provide a spouse with a monthly income to pay for essential outgoings and regular bills, including child care and school fees until the children reach maturity at age 21 or 25. There are options to receive income on an increasing basis and there is also a choice regarding the frequency of income payments between monthly, quarterly and yearly.
GIFTS INTER VIVOS Plans are designed to cover the potential inheritance tax liability that could arise in the event of death within 7 years of making a gift
Additional Options (top)
Additional options can be added to the Policy at extra cost to provide a wider and more comprehensive protection for the dependents.
INFLATION PROTECTION is a useful option to include if the cover needs to keep pace with inflation, in order to maintain the purchasing power in real terms over a specified term.
WAIVER OF PREMIUM is an option which, in the event of sickness or disability beyond a deferred period, enables the cover to be maintained in force free of premiums until you can return to work or reach the end of the term. A useful option which enables the life cover to continue at a time when the budget is likely to be under severe pressure and costs need to be cut.
CONVERSION OPTIONS can be added as an optional benefit under which the level term policy can be converted into a different type of policy without the need for any fresh evidence of health by a specified age (usually 55) . This is a particularly useful option to have as it would enable you to continue with life cover beyond the original term in the event of poor health in the future.
GUARANTEED INSURABILITY option enables you to increase cover within a set period following major life events such as Marriage, birth of a child, divorce and moving home to cover any increase in liabilities, by enabling you to take out a top-up policy without further medical evidence.
RENEWAL OPTION - Some policies are arranged on a renewable basis, which means that at the end of the policy term – typically 5 or 10 years – you have the right to take out a further policy for the same term as the original policy, without the need for any further medical evidence. However, the premium payable for the extended cover will be based on your age when you renew the policy, which means that the premium will be higher during the second half of the term than the first half.
Such an option is useful when the budget is tight initially.
CRITICAL ILLNESS COVER – some life assurance policies allow you to add critical illness cover as a bolt on at an additional premium. Critical illness cover pays out a lump sum upon survival for a defined period (typically 30 days) following the diagnosis of a number of pre-defined life threatening illnesses or conditions, such as certain cancers, a heart attack or stroke.
Critical Illness is a complex product and policies vary considerably in the width of the cover they provide, it is therefore advisable to take independent financial advice when choosing the provider and the policy.
Should the benefits be written under Trust? (top)
There are many reasons for passing assets to an individual via a trust rather than making an absolute gift to that person. An individual may wish to pass assets to a spouse in such a way as to provide income during the spouse’s lifetime, but protect the capital for the children on the spouse’s death. Similar considerations may apply to gifts to children. A trust can also be used to look after the assets of minors and disabled persons.
However, often a trust is created to mitigate some form of taxation. The essence of the arrangement is that the trustee has the legal ownership of the trust property but cannot use it as if it were his own property. He has to use it for the benefit of the beneficiary. In every trust there is this division of ownership.
Where life assurance policies are concerned, there are four main benefits to be gained from using a trust., Speed of payment, Certainty, freedom from IHT on death, and a degree of control.
This is a complex subject and the choice of the type of trust will depend upon the individuals circumstances and intentions.
How much will it cost? (top)
Although premiums vary from one insurer to another, the term assurance market is extremely competitive because of rapidly rising longevity and a highly competitive market.
Premiums for all types of life assurance are based on a number of factors namely gender, health, lifestyle (smoker or non smoker) age occupation and whether or not you persue any hazardous sports. It goes without saying that the lower the risk of you dying during the term of the policy the lower the premium will be.
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