What is life term Assurance?
What is Level Term Assurance?
A level term policy means that your sum assured will remain the same and will not change throughout the term of your plan. Irrespective of what you have outstanding on your mortgage or any other monies owing the plan will still pay out the same. If you have a repayment mortgage the cheaper option for you would be to take a decreasing plan so that your sum assured will reduce in line with your mortgage. With a level term plan, if you were to move house and increase your mortgage amount, all you would need to do is add the extra sum assured to your existing sum assured figure, however this would also depend on the term and any potential underwriting issues for example, with a £100,000 mortgage, if you were to have this amount insured and decided to move 10 years later and borrow £115,000 all you would need to do it take out a new plan for the additional £15,000.
If you had taken out a decreasing plan then you would have to take out a brand new plan for the whole £115,000, in addition to this as you are 10 years older the premiums would now be based on the fact that you are 10 years older too and therefore would cost more.
What is Increasing Term Assurance?
An increasing plan is when the sum assured increases in line with the Retail Price Index (RPI). Retail Price Index (RPI), is a measure of inflation published monthly by the Office for National Statistics. It measures monthly the official change in the cost of a sample of goods and services.You can choose the different rates being 2% 3% 5% etc.
The aim of an increasing plan is to increase the sum assured in line with inflation (often this is measured against the Retail Price Index) and the cost of living. As the cost of living goes up you can amend the plan to suit your ever changing circumstances, if required. It allows you to ensure that your family always has a sum assured that is relevant to the time.
When you consider the average price of a house was £25,000 in 1982, today that would probably be enough for your deposit. The aim behind an increasing plan would ensure that your sum assured remains relevant, no matter how long you have had the plan for. (1)
What is Decreasing Mortgage Insurance?
Decreasing mortgage insurance is where your sum assured will decrease throughout the term of your plan. Decreasing mortgage insurance is usually used in conjunction with people with repayment mortgages. The life insurance plan is the cheaper plan when compared to level term mortgage insurance. The premium is cheaper to begin with, however over time the sum assured will decrease but the premium will remain the same, an example of this is, if you took out your policy for £200,000 over 20 years, the plan would pay £200,000 if you died in year one, 10 years later the premium would not have changed however your sum assured would now be £100,000. In the final year of the plan, (year 20), you would still be paying the same premium value as you would have done in the first year, however, your cover would now be closer to £10,000. This will usually be in line with how much is owed in the final year of your mortgage.
The decreasing mortgage insurance plan will only work
s if you have a capital and repayment mortgage and the interest rate is less than the insurance percentage rate.
What is RPI?
The Retail Price Index (RPI) is a measure of inflation. It is linked to the increase in everyday household goods, for example, bread and milk. Your insurance plan can be linked to RPI to keep the plan relevant to inflation.
What is Family Income Benefit?
In many cases, in the event of death, when a lump sum is paid to a family, it is often surprising that the substantial lump sum pay-out may not stretch as far as they first envisaged. The family income benefit plan will pay out a monthly income, rather than a lump sum payment, which means every month your family can feel reassured, knowing that the money is coming in. Family income benefit can also help to prevent temptation as if you are to receive the money in one lump sum, it would be extremely easy to spend on something you would not usually necessarily pay out for, as the money was there and burning a hole in your pocket.
The money had been put into place to pay for school fees or to support the family for an extended period of time and not necessarily intended for spur of the moment treats or extravagances.
Imagine yourself in a situation where you are paid out your yearly salary in January. You now need to budget all of your costs for the next 12 months, to include, mortgage repayments or rent, bills, holidays, Christmas, the list is endless! Do you think you may run out of money towards the end of the year? Now, try to imagine how you would cope if you got paid up front for 10 or 20 years’ worth of salary. This is what you could be doing when taking out a lump sum to protect your family.
The family income benefit ensures there is ALWAYS an income each month, which will arrive in the beneficiaries’ account, just like receiving a monthly salary. There is no danger of the money running out early as it will arrive every month for the period of time set up in the family income benefit plan and will allow future expenses, such as school
s fees, bills, even the mortgage payments to always be paid. After all we are more used to being paid weekly or monthly rather than yearly, up front. The additional bonus is that the money is tax free.
In many cases a family income benefit is also better value for money than a level term plan.
What is Waiver of Premium?
Waiver of premium provides a means of insuring that you can meet your monthly premium payments. In the event that you are unable to work through ill health, payments are made until the end of the policy term, a specified age or until you are able to return to work. It is like insurance, on your insurance!
Two single plans
Many people will take out life cover when they are young, fit and healthy. The first inclination may be perhaps when buying your first home. If you decide to purchase your life insurance policy with a partner and your partner passes away years later, if you were to then try to take out another life cover policy, it may prove to be difficult. Many every day conditions, that we are liable to in later life, such as high blood pressure, cholesterol and other aches and pains, can make getting insurance later on in our life, much harder to do.
A way around losing our life insurance should our partner pass away would be to take out two single life policy plans. The cost may be cheaper for a joint policy, however the difference is relatively small, especially if you consider the fact that by taking out two single life insurance policies as opposed to a joint life insurance policy, can double the amount of your sum assured. Rather than the pay-out of £150,000 for your joint life insurance policy, it will now be two £150,000 pay-outs, so £300,000 in total, paid out to the beneficiary or beneficiaries in the event of you both passing away. Single policies will also allow you and your partner to change your own level of life insurance cover as time goes on as in many cases, both partners do not require the same level of cover. Having a single policy will also allow people to pay for their own share of their insurance which can be particularly useful if one of you has a pre-existing medical condition that may affect underwriting.
If one of you does have a pre-existing medical condition, you also have the option to split the cover so that the whole plan is not affected as it would be with a joint policy. The single policies allow the partner with the medical condition to take out a lesser sum assured figure, for example 50% of the mortgage. For example this allows Mr Jones to be covered for 100% of the mortgage and Mrs Jones to be covered for 50% of the mortgage. By having half of the mortgage covered it is better than having none of the mortgage covered at all. It allows individuals to cover themselves based on affordability.
In the event of a relationship break down, having two single policies will allow the individuals to continue with their life cover separately rather than having to reapply.
The extra risk involved for the insurance company is minimal as there is just as much chance of you claiming on a single plan as on a joint plan.
I already have Life Insurance
Some people may take out several life insurance plans in their lifetime. Your requirements at the age of 20 may not be the same as they are at the age of 25, let alone at the age of 45. Proadvice highly recommend that you regularly review your life insurance policy and this also allows your Proadvice adviser to keep you informed of any changes in the insurance market that you need be aware of and to ensure that your life insurance policy is still relevant to your needs. If your rates change or there is a saving to be made, Proadvice are certain that you will want to be updated.
Proadvice are aware that keeping up with the latest insurance news is not your top priority and you probably have more exciting things to do, however it is our job to keep abreast the insurance market. Recently, due to changes in the law and insurance company’s initiatives, it is now possible for limited companies to get the tax man to pay for the director’s life insurance. The insurance market is evolving and these changes are happening regularly.
Proadvice clients were happy to hear recently that the two most common type of cancer in men and women have now been added to some of the insurance companies’ critical illness proposals, whereas they had been excluded previously.
If you have not reviewed your insurance policy in a while or have any questions, please do not hesitate to speak to a Proadvice adviser today. You may even find that you are entitled to a discount on your new policy, if you choose to renew with the same insurance provider
What else should I know?
If your life insurance plan pushes your estate over the inheritance tax bracket nil rate band, (which changes from time to time) then your life plan could be taxed. Your Proadvice adviser will be able to explain how to avoid being taxed on your estate when setting up your insurance plan.