Life Assurance Explained
Whole of Life
- With a surrender value that is built up over a period of time. These are subject to Conduct of Business Sourcebook (COBS) regulations.
- Without a surrender value and therefore less expensive than above – these are subject to the less onerous Insurance Conduct of Business Sourcebook (ICOBS) regulations.
Policies can be:
- With Profit: an investment element is included and bonuses are intended to be added yearly to the basic sum assured. The pay-out on death is the sum assured, plus any investment profits allocated to the policy.
- Non Profit: commonly used for funeral plans and similar to term assurance: there is no investment and premiums are fixed so that a cash lump sum is paid on death which is also a fixed amount.
- Unit-Linked: a cash value is built up through investment that will be dependent on the proportion of the premium that is invested and the performance of the investment.
Unit-linked ‘Whole of Life’ policies:
- Maximum cover plans – premium is fixed for a specified term (usually five or ten years) and then reviewed in line with policyholder’s age at which point premiums are likely will rise. A surrender value may accrue but this is often used to pay for the insurance cover.
- Standard cover – premium level does not change during the period of the policy as long as the investment returns fulfil a pre-determined rate of return (eg 5% per annum).
- Guaranteed cover – no investment element (although there may be a surrender value) and cover is guaranteed at a certain level throughout the term. Therefore often called ‘whole life non-profit assurance’.
- Level – premiums and cover stay the same for the entire contract.
- Term 100 – premiums and cover run to the age of 100.
- Increasing – premiums and cover increases by a set amount each year .
- Decreasing – premiums and cover reduce by a set amount each year. Premiums are usually paid for a slightly shorter period than the contract duration. See below.
Decreasing term assurance is used for:
- Mortgage Protection Assurance where the mortgage is a repayment type and the life insurance falls at the same rate as the outstanding mortgage
- Return of Premium Assurance where the premiums are returned at the end of the policy if there has been no claim. Premiums will be more expensive.
- Gift Inter Vivos Term Assurance which is where the sum assured decreases to correspond with a lifetime gift or inheritance.
- Family Income Benefit
- Sum assured is paid each year from death to the end of the policy
- Can be paid as lump sum or annually
- Premiums can be level or increasing (escalating)
Family Income Benefit is regarded as Decreasing Term Assurance because the longer the policy runs, the less benefit will be received in the event of a claim.
4 Features of Term Assurance
Term assurance cover can be
- Convertible – to a Whole of Life or Endowment policy
- Any combination of these
Reviewable Term Assurance
Term assurance policies can be reviewed after set periods and, in this respect, are very similar to Maximum Whole Of Life policies.