Life Assurance is of course fundamental for almost everyone. Surprisingly however, many people are not quite sure what they need, and indeed if they need, Life Assurance.
Assurance or Insurance? Although both these words are used, and generally understood in any context, there is actually a subtle difference. To be precise:
Assurance normally relates to something that WILL happen (i.e. you can be assured the event will happen) – hence Life Assurance (more aptly Death Assurance) – regrettably, you can be assured your life WILL end sometime!
Insurance normally relates to something that MAY happen (i.e. you can insure against the event and be compensated) – hence Motor Insurance or Home Contents Insurance - you MAY lose or break something or have an accident.
Life Assurance is commonly divided into three broad sectors. There are variations to each but the basic principles are as follows:
1. Term Assurance
This is the pure form of Life Assurance and the most popular. It
is taken out for a set number of years (the Term) usually determined
by the number of years when the death of policy holder would leave
commitments – eg. Young family or substantial debts for survivor
(mortgage etc).
There is normally a fixed premium which does not change during the whole Term. The sum assured will be paid on death within this Term. If you survive the Term you get ‘congratulations’ but no pay-out.
For this reason this type of assurance is relatively inexpensive – although the older you are at outset the more expensive it is.
It makes sense therefore to consider this type of assurance at a younger age.
Term Assurance is appropriate for someone with liabilities that need to be covered on their death – typically a partner and/or young family. It can be arranged to cover the most vulnerable period of time - for example whilst children are growing up and dependant.
International Term Assurance from Friends Provident also includes a considerate option of payment following diagnosis of a terminal illness.
2. Whole of Life Assurance (WOL)
This type of policy is ‘for life’ and thus pays out
on death whenever it occurs.
Some WOL have a fixed premium payment term e.g. 75 (or on death if earlier) – others require payment throughout the life of the insured. It can therefore be relatively expensive and is not often used.
A variation however which is more popular is a reviewable WOL whereby the sum assured is set for a fixed period of time and then reviewed. Premiums are invested and if the value of the insurance is sufficient the gain can either be taken and the insurance ceased or used to extend the fixed term. If the investment does not match premium requirements the sum assured is reduced.
3. Capital Life Assurance
This type of Life Assurance includes the normal risk described for
Term Assurance but also provides a ‘pay-out’ on survival.
It is really a Term Assurance combined with a Savings Plan (often
called Endowment).
The eventual pay-out and the sum assured on death can be varied. For example the sum assured on death can be minimal with a greater sum on survival, or vice versa.
The premiums are of course higher than for straightforward Term Assurance and in essence simply comprise a proportion for the ‘inclusive Life cover’ plus a Savings element. The higher the Life cover the smaller the eventual pay-out’.
The best use of such an assurance however is to select minimum Life cover and maximum Savings. Necessary Life cover can be supplemented with a Term Assurance as required.
This way, should it be necessary or desired to stop this assurance, the important Life cover provided by a separate Term Assurance is not affected.
There are tax and other advantages to saving through a Life Assurance but it is a ‘disciplined’ way of saving and such contracts should not be entered into lightly.
To ensure the advantages of saving in this way the duration of these contracts should normally be for a minimum of 7-10 years – the longer the better.
There are many ‘variations on the theme’
of Life Assurance. Please contact Spectrum International for individual
appropriate advice.