Pension Term Assurance provides life assurance cover and allowed tax relief to be claimed on the premium payments at the policyholder’s highest or marginal rate of tax. This changed in 2007.
Cover is no longer available for new customers, but those with existing policies can continue to have tax relief added to their premiums, thus reducing the cost of the insurance.
Relevant Life Policies
Alternative policies to PTA are called Relevant Life Policies which are taken out by an employer with the purpose of providing ‘death in service’ cover for employees. Cover is provided up to 4 x salary and is usually part of a registered group scheme.
Multiplans (also called Universal Life Plans) are comprised of a number of different types of cover within the same policy, eg level term assurance with income protection. They:
- Are designed to be flexible and responsive to the policyholder’s changing circumstances.
- Have lower charges and less overlap of cover
- Are more complex to set up
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.
Life insurers use mathematicians called actuaries to calculate what premiums should be charged for life insurance. The actuaries based their calculations on mortality tables, as per the example on this pdf.
If you refer to the first and second rows of the table you will see that, out of 100,000 male babies born, 598 die before they are one year old and 99,402 are still living at age one. Out of 100,000 female babies born, 484 die before they are one year old and 99,516 are still living at age one.
In the second and third rows of the table which corresponds to the second and third years of age, 44 male babies will have died aged one last birthday and 99,358 survive to the age of two. For females, 31 male babies will have died aged one last birthday and 99,486 survive to the age of two.
Each row shows the numbers of males and females dying and surviving at each subsequent year of age until, at age 111, not a single survivor out of the original 100,000 remains alive.
What the columns mean
The qx column in the table is the probability that a person aged x will die before reaching x+ 1, and is thus the mortality rate for that age.
The ex column is the expectation of life for a person aged x. Thus a male aged 40 can expect to live on average a further 37.657 years.