Family income benefit
As with term assurance policies, family income benefit policies provide cover on death if you die during the policy term. But instead of a lump sum, it gives regular set payments (income) for the rest of the term of the contract. Premiums remain level throughout and if you live beyond the end of the policy, there will be no pay out. As this type of contract only provides cover in the event of death there is no surrender value. So if you stop paying the premiums at any time, your cover will stop immediately and you won’t get any money back.
As it is a fixed term, there is no flexibility and you won’t be able to increase cover or extend the term. If you become ill near the end of the term (duration of your policy) you might not be able to get further cover.
Income payments keep pace with inflation so you can usually have them increased as inflation rises. It’s also possible to take a cash sum instead of the income option upon death.
Many policies now have additional features:
• If you can’t work because of an accident or illness your contributions are paid for you.
• The policy will pay out if you are diagnosed as having less than twelve months to live.
Level term life assurance is the cheapest method to ensure a life. The premiums – the money you pay each month – remain the same throughout and if you survive until the policy runs out you won’t get any payout. This type of contract only provides cover upon death and there is no surrender value (you won’t get any money back if you cancel at any time). If you stop paying your monthly premiums your cover stops immediately.
Premiums are based on your personal circumstances but the main areas for consideration by an insurer are your age and state of health. The older you are and if you smoke the higher the premium will be. Similarly if you have or had a serious illness the insurer may charge you more or in some cases be unwilling to cover you at all. And the higher the level of cover you want and longer you need it, the more it will cost you.
Level term assurance is cheap cover on your life which will benefit your family or your business, but there are limitations to it.
As it is fixed term, there is no flexibility and you can’t increase the cover details or extend the term i.e the length of you policy. So if you become ill near the end of your policy you might not be able to get further cover. But you can sometimes buy an add-on called a renewable option which means that you can extend the term of the cover but that can cost more.
Mortgage protection policies provide cover that matches the outstanding balance of your repayment mortgage loan. If you die during the term of the policy, a lump sum is payable which is used to pay off the remaining balance of your mortgage. These plans are not suitable if you have an interest only mortgage
As this is a fixed term contract there’s no flexibility and you won’t be able to increase the cover or extend the term without taking out a new policy.
Whole of life
Whole of life cover pays out a lump sum in the event of death, no matter when it happens. There is no specified period. Whole of life policies are generally used to provide security for a family, and are especially suitable for Inheritance Tax Planning.
The most common policies are unit-linked, which means the premiums you pay each month are paid into an investment reserve. This reserve is put into investment funds chosen by the client and is professionally managed to achieve the best possible return.
Part of it is taken monthly to pay for your life cover. Such policies are usually written on one of two bases:
Maximum cover offers a high initial level of cover for a low premium, until the first plan review which is normally after ten years. The low premium is achieved because very little of your premium is kept back for investment – most of it is used to pay for the life cover.
After review (described below) you’ll probably have to greatly increase your premiums to keep the same level of cover because it all depends on how well the cash in the investment reserve (underlying fund) has performed.
This cover balances the level of life insurance with adequate investment to support the policy in later years. This maintains the original premium throughout the life of the policy. However, this relies on the value of units invested in the underlying fund growing at a certain level each year. Increased charges or poor performance of the fund could mean you’ll have to increase your monthly premium to keep the same level of cover.
The level of protection selected will normally be guaranteed for the first 10 years at which point it will be reviewed to see how much protection can be provided in the future. If the review shows that the same level of protection can be carried on it will be guaranteed to the next review date.
If the review reveals that the same level of protection can’t continue you’ll have two choices ;
• Increase your payments
• Keep your payments the same and reduce your level of protection