Protection Planning

Life Assurance

Life Assurance is used primarily:-

To provide money for people who financially depend on you.

If there is no one who will be financially distressed by your death, life assurance is probably not essential, though there are other reasons why it would be useful.

That said, the following are all situations that may require the use of life assurance.

  • Mortgage. If the house is to be lived in by your partner or children then it is normal practice to ensure that the mortgage is cleared on death.
  • Money for dependents. If you have financially dependent children then money will help provide for them, perhaps by allowing the surviving partner to stay at home or work part time for some years.
  • Business debts. Banks and creditors get worried when key people die. Credit lines get shortened or even pulled, often with fatal consequences for the business. If you are a key person your business could insure you to provide cash flow to settle all debts and recruit a new person.
  • Business partners and co-directors. If you die you hope that your colleagues will pay a fair value for your share of the business, but they can only do this if the funds are available. Assurance can be used to provide this.

The good news is that many people already have some life assurance and in many cases this will suffice for their needs, although as needs and circumstances change, it may need updating.

If you are a member of a good company pension scheme, read your benefits booklet. You may well find that if you die your spouse and/or children will get a lump sum and/or a pension. If you provide us with the details we can calculate the benefits and make sure that they will be sufficient. One problem with some old fashioned schemes is that unmarried partners are not always treated as a spouse.

You have probably already got life assurance to cover your mortgage, but it would be worth checking that the current level of cover is sufficient for your current situation.

If you are not in a good company pension scheme and are self employed, or in business, and have dependants, then it is essential that you have your position assessed. We can help you do this.

Protection

There are many types of policy, all with different features and benefits. The aim of good planning is to ensure that the policy matches the risk.

The main elements in a policy and its pricing or cost are:-

  • Term – for how long is the protection needed? This might be known (eg until a loan has been settled), or guesstimated (eg until the children are old enough to stand on their own feet, say aged 18 or 21).
  • Amount (Sum Assured in the jargon), (and does it need to change over time) - If you borrow £100,000 on an interest only mortgage, you will owe £100,000 right up until you pay the mortgage off. But if you have a repayment mortgage the amount you owe decreases every year as you slowly repay the debt. In that case you need a policy where the cover decreases as well. (This will be typically cheaper than one where it doesn’t).
  • Investment - Whether or not the policy includes any element of investment.
  • Convertibility - Whether or not you need the ability to change the nature of the policy after it has begun.
  • Who – Who is to be insured? Clearly their age, sex, smoking/drinking habits and state of health will be important in determining the cost.
  • When – When does it pay out? If only one person is being insured it will pay out on death, but if two (or more) people are being insured, does it pay out on the death of the first person or the second?

These elements will be explored below, as we highlight the main types of policy. (In theory you can have a policy built to fit any need, but unless you are a very rich person with very complex affairs, the policies described below should suffice)

Term Assurance

Term Assurance - At their most basic, these are policies where you have a fixed sum assured for a fixed period of time, eg £100,000 for 20 years.

If you survive the term, you get nothing. There is no element of investment.

As a rule, if you need to make any changes these will be at the discretion of the insurance company, (though some contracts will allow special occasion changes, such as being allowed to increase cover if you have a child).

  • Cost – they are the lowest cost for protection, and if you have a requirement for a simple insurance of this nature you get maximum value for money.
  • Uses – for covering fixed or estimated liabilities, often used to cover debts such as mortgages

One important use is for companies to insure their important staff members. If that person dies the company gets an injection of cash to tide it over. (For a small company the loss of a key salesman or designer could kill the firm, and would at the very least present a massive and distracting management problem as an attempt is made to keep everything going).

Term policies may also be increasing (eg in line with inflation), decreasing, convertible, renewable (in that at the end of the term you could keep it running), but the main options and types are detailed in the following pages.

With such policies there is no surrender value and cover will cease if premiums are not paid.

Family Income Benefit

Family Income Benefit (FIB) - These are term assurance policies specifically designed to meet the needs of parents with (or planning) children.

They provide for an income payable from the date of death until a fixed time in the future (eg the youngest - newborn-child’s 25th birthday).

So if you have a £20,000 pa 25-year FIB policy and you die the next week, your family gets £20,000 for 25 years = £500,000 in total.

If you die when the child is 20, your dependents get £20,000 for 5 years = £100,000 in total.

As you can see, this means that the older you get, the less life assurance you actually have. This keeps the costs down. It also means that the policy is what is technically known as a Decreasing Term Assurance.

Additional notes:-

  • FIB policies might have extra options (for example to take account of inflation the income might rise each year).
  • You might be given the option of having a lump sum instead of an income. (The lump sum would be the discounted value of the income. In essence if given the choice, you look at the numbers and make your choice at that time).
  • It is normal to opt for a 25 year term if you expect to have more children in the future. This ensures that your future youngest should at least be covered through University. If however your children are already at school, and no more are planned, clearly shorter terms will be used based on what is actually expected to happen, (eg is University a likely option, or will they be joining the world of work from 16 or 18?).

It is often the case that 2 single life policies are only a little more expensive than a joint life policy. Always get three quotes (Fathers Life only, Mothers Life only, and a Joint Life one ). In order to select the most suitable option for cover, we recommend that you speak to us.

With such policies there is no surrender value and cover will cease if premiums are not paid.

Decreasing Term Assurance

Decreasing Term Assurance - These are policies, (similar to Family Income Benefit policies) where the sum assured decreases over time. However, they pay out a lump sum, whereas FIB plans pay out an income.

Commonly used to cover debts where the capital outstanding decreases over time.

With such policies there is no surrender value and cover will cease if premiums are not paid.

Convertible Term Assurance

Convertible Term Assurance - These are policies with a specified term.

Once the term has expired the policyholder has the choice to convert the plan to a different type of contract which can be a further term plan, an endowment, or a whole of life contract.

Mortgage Protection Policies

Mortgage Protection Policies

These are Decreasing Term policies, where the rate of decrease in cover is designed to reflect the rate at which the mortgage debt will be paid - aimed at people with Repayment Mortgages.

Whole Of Life Policies

These are policies that are designed to provide life assurance for the whole of your life. (As opposed to Term policies that last 5, 10, or perhaps 25 years then finish).

Small sums are often used to cater for funeral costs, but otherwise their use is largely limited to niche applications (eg to provide funds to meet any expected Inheritance Tax liability).

Some policies may build up a fund value over time, but this is best viewed as a side effect of their technical structure, rather than a reason for purchase.

There are two key types of Whole of Life Policy :-

One where the premiums are Fixed for life (thus Guaranteed) , and ones where they can be Reviewed by the insurance company (thus reviewable).

Reviewable contracts are often lower cost (and sometimes called Lost Cost Whole of Life), but you are taking a risk. See Technical notes below.

Technical notes for Reviewable contracts - The premium depends upon the provider achieving it's investment growth targets, and it's actuarial experience. If people in general live much longer, and/or long term performance is much worse than expected, your premiums might increase later in life, and if you are in ill health, you may not be able to switch to another more competitive provider.

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