Glossary

Term Assurance

Term Assurance, often referred to as life insurance, is designed to provide cash either by lump sum or regular payments in the event of death during a specified period of time.

Term Assurance policies have no surrender value at any point during the term, and therefore have no cash-in value if you cancel the policy early. If no claim is made the policy will cease at the end of the term, again without value. The cost of this type of life insurance is lower than whole of life policies given the amount of life cover provided. Term Assurance will usually run until the age of retirement by which time your family will be self-sufficient on not reliant on you financially.

Additional benefits can be included such as critical illness cover and waiver of premium

There are essentially 3 types of life insurance.

Level Term Assurance

This is where the amount of life insurance, or sum assured, remains level throughout the term of the policy. If you are taking out life insurance to protect your loved ones in the event of your death you will need to consider level term assurance to ensure that the level of protection remains constant. You will also need level term assurance if you have taken out an interest-only mortgage.

Decreasing Term Assurance

This type of life insurance is specifically designed to protect a capital repayment mortgage in the event of death, and is often known as mortgage protection insurance. The sum assured decreases over the term of the policy roughly in line with your outstanding mortgage debt, although the premium will be determined at the outset and will remain the same throughout the plan. Decreasing Term Assurance is usually cheaper than Level Term Assurance. With some insurers you will be able to select the interest rate on which the reducing cover will be based.

Occasionally if you have assigned your policy to a lender, conditions may not automatically allow you to benefit personally but may insist that the sum assured repay the debt.

Indexed Term Assurance

Life insurance that allows for the sum assured to increase each year, usually in line with the Retail Price Index (RPI) up to 10% in any one year, thus retaining its value in real terms.

Single or Joint Life

Policies can be taken out on either a single or joint-life basis. Single life insurance affords cover individually, whereas a joint-life plan will pay out on the first event only and then the policy ceases.

Terminal Illness Cover

This is often included in life insurance policies at no extra charge and should not be confused with Critical Illness cover.
This enables the life insured to claim the sum assured before they die. A claim can normally be made if the life insured is suffering from a terminal illness where in the opinion of a consultant physician they are unlikely to survive for more than 12 months.
However, exclusion to this cover is if the terminal illness is diagnosed within the last 18 months of the plan term in which case payment of the sum assured is made on death if before the end of the policy. You must also be resident in the UK or certain other agreed countries at the time.

Waiver of Premium

Waiver of Premium or Premium Protection allows you to protect your policy premiums in the event of you suffering ill-health or an accident rendering you unable to work. It normally provides that if you are ill for 6 months or more and unable to carry on your normal occupation then the insurance company will pay or "waive" the premiums from the 7th month onwards. The benefit ceases when you recover and return to work.
This means that your policy is protected against lapse should you be unable to fund the premiums due to lack of income. Some insurers will offer shorter or longer deferred periods and the benefit can be set on an ‘own occupation’ basis or any occupation. Terms are selected at the outset and a small additional cost is included in the premium dependent on the level of cover chosen, your occupation at the time and your state of health. On average this amounts to as little as 3% of the premium, per life covered.

Guaranteed Insurability

If you apply for life insurance before you are aged 45, and you are accepted on normal rates some insurers will allow you to increase the amount of life cover at a later date without medical evidence, although there would be an increase in the premium should you exercise this option.

Insurable Interest

Insurable interest exists when one party has a close and/or dependent financial relationship to the other. Common examples of insurable interest are those between spouses, a company on its key persons, director shareholders on the other director shareholders in a close company and anyone who is financially dependent on a particular person.

Life of Another

In most cases the applicant for the policy is normally also the life insured. However, a person with an insurable interest can apply for a life insurance policy on the life of another. The applicant in this case becomes the legal owner of the policy and not the life insured.
The applicant must be able to prove that they have an insurable interest in the life being insured to the insurance company. For example, a wife has an insurable interest in the life of her husband. Partners in business together have an insurable interest in each others lives for the purpose of the business.
If there is a claim, the applicant is entitled to the proceeds of the policy. When the application is made there is a special section on the form which the applicant completes to establish that the policy is being applied for by a person other than the person whose life is being insured.
A common example of this would be a wife making an application to insure her husband. There is obviously an insurable interest and in the event of a claim the proceeds are paid outside the deceased's estate directly to the policyholder. In this case the deceased's wife. The wife is the policyholder and owns the policy.

See also Trusts

Life Insurance for your Business

Often referred to as Keyman Insurance this life insurance offers level term assurance on those individuals who are ‘Key’ to the business, i.e. someone who makes a considerable contribution to the success of the business, whether that be the Managing Director or a particularly skilled individual who would be irreplaceable. This cover is taken out by the ‘business’ to protect against the death or incapacity of such a person where their absence would result in financial loss.

In order to have an effective Keyman insurance policy you need to quantify how much the Keyman is worth to the company and what the company would need in the event of this persons premature death or disability.

In some cases where there are two individuals who own a company the policy may be taken out to pay a lump sum that will in turn allow the surviving partner to buy the deceased's partners family out of their interest in the company allowing them to split and go their own separate ways. This protects against shares falling into the hands of a competitor

Companies can in some cases claim tax relief on the premiums paid into the life insurance, however this will in turn render the proceeds taxable. You should check with the tax office prior to taking out a plan as to whether it qualifies for tax relief and what your obligations are concerning this.

Life insurance can also be taken out to provide a death in service benefit for selected employees. The sum assured is usually a multiple of the annual salary and at present the Inland Revenue allows up to 4 times salary as a maximum.

It is possible to set up a group level term assurance policy which is company owned and funded but on the life of another. The employee is not taxed on this although the company can claim corporation tax relief on the premiums.

Factors Affecting your Premium

There are a number of factors which CAN affect your premium:

• Your state of health up to and including the time of application
• Whether you currently smoke, or have smoked tobacco products in the last 12 months
• Your occupation is taken in to account
• The number of years the term assurance has to run
• The sum assured
• Whether you have requested waiver of premium on the policy
• Whether you engage in any hazardous sports
• Your age at the time your policy goes on risk
• Your gender
• Whether you travel outside the UK, other than for holidays, on a frequent basis and to which areas of the world.
• Whether your parents died, or suffered from certain illnesses like cancer or stroke before the age of 65
• Whether the life insurance is for level term cover or whether it increases or decreases
• Whether your policy is set up with guaranteed premiums or reviewable premiums

Determining the Level of Cover you Require

The level of cover you require will depend on your personal circumstances; however you should generally take enough cover to provide a lump sum that would pay off your debts or provide an investment income sufficient to support your dependants over a required period of time.
Before choosing the level of cover you require, you should consider the following:

• What effect would my death have on the family income?
• Would my death increase family expenditure on items such as childcare?
• What existing cover do I have, including cover from my employer?
• What effect do my existing savings have on my cover requirements?
• Will my family receive state benefits if I die?

Guaranteed and Reviewable Premiums

Guaranteed premiums are guaranteed never to increase for the full term of your policy. They are higher than Reviewable premiums but do allow you to accurately budget for the cost of your cover.
Reviewable Premiums are reviewed regularly, usually every five years, by the insurance company and can be amended depending upon their claims experience and other factors.

Family Income Benefit

This type of life insurance allows for you to receive your payout as a regular monthly income rather than a lump sum.

When someone takes out life cover to protect their family they do it on the basis that should they die they want their family to have enough money to continue to live in the style they are accustomed to. Many people take out life insurance to protect their mortgage or to provide a cash lump sum, however, what is often forgotten is that there are still ongoing daily expenses. Family Income Benefit is used to provide the financial security to cover these commitments.

It is available as death benefit only or with critical illness insurance included and can be written as a joint or single-life policy as required.

Family Income Benefit Policies can take into account such things as inflation and the income is paid to your family without them having to worry about investing money and hoping for good returns.

They provide an income on death for the term of the plan and as an additional benefit you can add indexation to the plan which means that it would keep pace with inflation.

As with life insurance, you can add waiver of premium benefit to the plan to protect your premiums.