When you buy life assurance, you are simply arranging for a sum of money to be paid out on your death, but is it really that simple? Let McCrea Financial Services Limited guide you through the maze of Life Assurance products and help you find what you really need.

The reasons for having life assurance can be one or all of the following:

• Repay mortgage or other debt
• Family Protection
• Business Protection – Shareholder/Partnership/Keyman
• Potential Inheritance Tax liability

Life assurance can be divided into two basic types - policies that offer protection only and those which have an investment link.

Protection-only policies (usually described as term assurance), pay out if you die within a specified period and have no encashment value.

Investment-linked life assurance includes 'endowment policies' and 'whole of life policies'. Even these two types of Investment-linked Life Assurance can have very different aims.

Consider who needs to be insured. If you are part of a couple, the natural thing would be to insure jointly however for a relatively little amount extra you could insure yourselves separately and if you both were to die within the term double the benefit would be paid to your remaining beneficiaries.

There is also the subject of Trusts to consider. In most cases, your policy is paid out free of income tax on your death, however the benefit will form part of your Estate for Inheritance Tax Purposes and may inadvertently leave you or your partner with an Inheritance Tax Liability.

When you die, the Capital Taxes Office wants to know how much you are worth? They will investigate the value of your Estate and only release monies when they are satisfied anything owed to them is paid. By writing your life policy in Trust, the beneficiaries are paid as quickly as the Life Company can turn around the claim.

How much cover do I need?

Life assurance is a subject most people don’t like to think about, as it makes them face up to the reality they are mortal. If you have a family and need to provide for them, it is important to think about the effect on them if you were to die. Even if the mortgage is paid off, would this really be enough to keep the wolf from the door when you are gone?

Does £100,000 seem like enough? It is a nice round sum and it sounds like a lot of money but once the mortgage is paid off there will still be other bills (council tax, gas, electricity, food etc etc) that will continue to come in once the mortgage is repaid.

Some life assurance experts will suggest you consider a policy that covers 20 times salary. The idea, based on an assumed interest rate of 5%, is that this lump sum would provide an income equivalent to salary. However if you are young or only starting out in your career, would this be enough, when taking into account your full potential earnings?

Premiums

You can select at outset if you want the premiums to be guaranteed for the term of the plan. Reviewable premiums are cheaper to start with but it is difficult to estimate by how much the premiums will rise when they are reviewed and this will be dictated by the chosen insurer.

Waiver of Premium Benefit

This option can be added to most types of life assurance policies and is designed to ensure your monthly premiums are paid if you become unable to work due to illness or accidental injury.

This benefit is normally deferred for the first 13 or 26 weeks of your incapacity and will stop on the earliest of: your return to work, the policy ending on payment of the death benefit, the policy anniversary before your 60th birthday or the end of the benefit term.

Protection Only Policies

You can select at outset if you want the premiums to be guaranteed for the term of the plan. Reviewable premiums are cheaper to start with but there is no way to estimate by how much the premiums will rise when they are reviewed.

Level Term Assurance

• This type of cover protects you for a given term for a fixed benefit. The amount of life cover chosen at outset will be paid whether a claim is made in the first year of the term or the last year. Quite often a payment would be made on the diagnosis of a terminal illness before the last 18 months of the plan, where you had 12 months or less to live. This type of protection is suitable for family protection and Interest Only Mortgage debt, where the level of debt on the mortgage does not decrease as the years progress.

Increasing Term Assurance

• This type of cover protects you for a given term for an increasing level of benefit. The amount of life cover chosen at outset rises annually by a predetermined factor, normally Retail Price Index (RPI). This is known as “indexation”. The premium will also increase by the same factor. By selecting indexation you are protecting the purchasing power of your selected benefit. This is suitable for family protection.

Decreasing Term Assurance

• The least expensive of the Term Assurances, Decreasing Term Assurance does what it says on the label. The level of benefit decreases as the term of the policy runs; the premiums do not however reduce. The premiums are fixed throughout the policy term, and the premium level is lower than that of Level-Term Assurance as a result of the decreasing benefit. This type of life assurance is commonly used to protect Capital & Repayment mortgage debt. Typically the policy reduces the protection assuming a Mortgage Interest Rate of 10%. Many are paying mortgage interest at around 5%, and providing interest rates do not go over 10% the benefit should reduce slower than the mortgage debt, ensuring repayment of the mortgage debt in full.

Family Income Benefit

• An often-overlooked type of cover, Family Income Benefit protects a level of income for a fixed term. The amount of income chosen at outset will be paid for the remainder of the term of the plan. Often the term is set to protect you until your youngest child is 18 or 21. This protection is not as expensive as you may think. For example, for £20,000 increasing benefit for 21 year, for a non-smoking couple, male age 35 and female age 32, the starting premium would be approximately £27 per month.
  
  An increasing term assurance for £400,000 (which would produce an income of £20,000 if withdrawing 5% per anum) would cost approximately £45 per month. Indexation is recommended for this type of plan to protect the purchasing power, although the benefit can be level. If indexation is elected at the outset, the premiums and benefit would rise annually normally by Retail Price Index.

*Source: The Exchange 03/01/08

Renewable Term Assurance

• This type of Term Assurance gives you the option, at the end of the original term, to extend the policy for a further term, without the need for Medical Underwriting. The new premium will be based upon your age at the time you take up the option. This type of cover is initially relatively inexpensive, but the premium will be higher than for ordinary term assurance and could rise substantially at the time of renewal.

Convertible Term Assurance

• Like Renewable Term Assurance, this type of term assurance contains an option at the end of the term. This time it is to convert it into an endowment or whole of life policy without the need for a medical. The option must be exercised before the plan ends. The level of protection cannot be increased upon conversion and although your health is not taken into consideration at the time of conversion, the terms offered will be based on your age.

Investment Linked Policies

As well as paying out on death, these build up an investment value that may be cashed in during your lifetime.

Endowment Policies

Many are familiar with Endowment Policies and have been selling or surrendering them due to disappointing investment returns. An Endowment Policy is designed to return a specified target sum of money at the end of the term. If however the life assured dies during the term of the plan, a specified lump sum benefit would be paid. These policies can be expensive and as some of the premiums are used to provide for the life assurance element, the full premium is not be used for investment purposes.

If you are considering surrendering your Endowment or think you have cause for complaint, speak to McCrea Financial Services Limited before you do anything. There are alternatives to surrendering your Endowment.

Whole of Life Policies

A whole of life policy is another policy, which does exactly as it says. It covers you for the whole of your life. When the inevitable happens, providing the policy is still in force, it will pay out a death benefit. Although they can provide a surrender value, they should not be used for investment purposes due to the deductions made for the death benefit.

As payment of the benefit is inevitable Whole of Life policies tend to be more expensive than Term Assurance policies for the same level of cover (it depends on what age you are when you start the plan). Each premium is made up of a mortality element and a savings element. The savings element should build up an investment fund to pay out the benefit on death. The performance of the underlying investment Fund for Whole of Life Plans is important, as the cost of future premiums depends of fund performance.

If you are worried about investment risk, and increasing premiums there are Whole of Life policies available, which do not rely on fund performance however, these do not acquire a surrender value.