There are many forms of life assurance, choosing the right one for you can depend upon a number of factors including tax, cost and the protection required.
Life assurance can be used to protect your mortgage, loved ones and businesses and, in certain circumstances, can be arranged in such a way as to minimise the effect of tax.
Term Assurance
Term assurance is generally the cheapest – and simplest – form of life assurance. You insure yourself for a set term – until a loan is paid off, for example. It doesn’t contain any investment element – it simply promises to pay out if you die within the term. If you don’t die within that time, you receive nothing.
Term policies can either be level or decreasing. A level policy simply means the sum assured remains ‘level throughout the term of the policy. If you die on the first day of the policy, you get exactly the same sum as you would if you died near the end of the policy. A decreasing term assurance policy on the other hand, will pay out more at the beginning of the policy than it would at the end.
The way a term policy pays out can also come in one of two ways. Those that pay out a tax-free lump sum on death and those that pay a tax-free income to the end of the term, known as family income benefit policies. As usual there are pros and cons to both, a lump-sum policy can be more flexible because it allows your family to have a mixture of lump sum and income upon your death, but the income may be dependent upon investment returns at the time of death. A family income policy on the other hand is often cheaper because the liability is always decreasing for the insurer, for example, if you die in the 18th year of a 20-year policy, the insurers would only have to pay income for two years. It’s also easier to work out the level of cover with this type of policy because you simply work out the income you would need to replace.
These plans have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse
Mortgage Protection
Mortgage Protection is a kind of Term Assurance specifically designed to repay, on death, during the term, the amount outstanding on a ‘capital and interest’ repayment mortgage. In other words, if the policyholder(s) die prematurely, the outstanding loan amount on the mortgage will be repaid in full.
Some policies have rider benefits, which are extra sorts of cover, added on to the principal life cover. Such benefits include:
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- Waiver of premium benefit – the premiums are in effect paid for you in the event of defined incapacity due to illness
- Income protection benefit – a percentage of your income is paid to you if you cannot work at your usual employment
Unemployment benefit – a variety of income protection benefit
These plans have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse.
- Critical illness cover – the benefit is paid before death on the diagnosis of life shortening disease (e.g. cancer). This benefit may replace the death benefit, or it may be paid as well
Plans may not cover all the definitions of a critical illness. The definitions vary between product providers and will be described in the key features and policy document if you go ahead with a plan.
All these riders cost extra and are only paid subject to meeting tight criteria.
These plans have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse
Whole of Life
Whole of life policies are designed to provide life assurance coverage for an individual’s whole life, rather than a specified term.
Whole of life policies can be useful for some people to provide for an inheritance tax liability.
Our independent advice, following a full review of your circumstances, will ensure you find a solution that provides peace of mind.
The value of investments can fall as well as rise and you may not get back the amount originally invested.
Please note that the Financial Conduct Authority (FCA) does not regulate will writing, tax planning and trusts.