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GAZETTE
APRIL 1989
Life Assurance
Life assurance nowadays is too of t en seen as a tax ef fect i ve
way of saving for the future or of paying off a loan. And, of
course, life assurance schemes can be used profitably for
both of those purposes. But the basic purpose of life
assurance should not be forgot t en - that is to provide
protection for dependants in the event of prema ture death.
Life assurance has certainly a no payment is made. For the same
role to play in most families'
savings plans. Because of the tax
relief allowed on premiums it can
provide a tax effective way of
saving for the future. It is only
useful, of course, for medium to
long term saving - perhaps taking
ten years as a minimum. While a
savings plan may be showing a
profit before that time, the heavy
initial set-up costs dictate that the
initial objective should be to save
for at least ten years.
Because of their perceived
attractiveness, savings type pol-
icies are most easily sold and they
also provide good commission
rates, but any tax adviser worth his
salt should initially determine that
other insurance needs are ade-
quately catered for. Savings type
policies do provide a lump sum on
the death of the insured person but
it is possible to get that type of
death cover far cheaper if you
dispense with the savings element
in the policy. That leaves you with
what is known as "Term" insurance.
cover, a man 35 years of age would
pay annual premiums of about
£20.50 and a man of 45, about
£56.50.
Convertible Term:
This provides
the same basic insurance cover as
level term assurance, but there is an
option to convert the policy into
another type. Usually the assur-
ance company allows conversion at
any time during the life of the policy
and agrees not to require any
further medical test or proof of
good health. The policy into which
you convert will operate from the
date of conversion and will be at
the normal premium rates applied
to such policies given the insured
person's age at the time of con-
version.
Term Insurance
Term insurance is simple protection
with no saving element attached.
If the person insured dies within a
set term of years, a lump sum is
payable to his family or depend-
ants. It is the cheapest way of
providing protection and it is the
first type of policy a young family
man on slender means should con-
sider. Within this general category
there are a number of different
possibilitiies.
Level Term:
In this case the sum
assured remains fixed for the term
of the policy. If the person insured
survives the term no payment is
made by the insurance company.
For example, for an annual premium
of about £14.40 (before tax relief)
a man of 25 years can be insured
for £10,000 for a period of ten
years. If he dies any time during
that ten years the £10,000 is pay-
able to his family. If he survives the
ten years the policy terminates and
A convertible term assurance
policy need not cost much more
than a long term policy and it is
generally worth paying the extra.
Decreasing Term:
This type of
policy is often referred to as a
mortgage protection policy since
they are often taken out for this
purpose. The life cover gradually
decreases over the term of the
policy as the amount outstanding
on the loan decreases. On new
house mortgages from building
societies it is now compulsory to
take out a mortgage protection
policy. These are organised by the
societies themselves and the
premiums are collected as part of
the repayments.
Family income Benefits:
This is
another type of term insurance
which provides, instead of a lump
sum, a regular income for the
family or dependants. For example,
for a premium of about £1.15 a
month, a man of 25 can provide
that his wife receives an annual
income of £1,000 a year each year
between his death and the end of
the term. In this case the term is
twenty years starting from the date
the policy was taken out. The
payment made by the insurance
company would not be liable to
income tax.
Whole of Life Assurence
Term assurance is pure protection.
There is no element of saving since
no payments are made if the in-
sured person survives the term.
With whole of life assurance there
is an element of saving, although it
is saving for your dependants after
your death. The insurance com-
pany undertakes to pay the agreed
sum - plus bonuses if you go for
a with-profits policy - whenever
you die. So unlike term assurance,
the payment is made at some time.
Obviously the premiums payable
for a given life cover are higher in
this case than a similar term assur-
ance. You can opt to pay premiums
up to death or else elect to stop
paying premiums at a certain age.
For most people, whose incomes
fall after retirement at 65, it is a
good idea to have premium pay-
ment stopping then.
Endowment Assurance
This is the most common form of
insurance policy sold, where the
saving element is uppermost. The
range is immense, from strict
"endowment" to "unit-linked"
policies. In all cases the main
emphasis is on saving with the
actual sum payable on death
relatively small per premium pound
compared with term or whole life
assurance. They are a topic to
themselves and will be considered
in a future article but they are best
considered as ways of saving or
investing rather than as ways of
providing insurance cover for
dependants.
What is best?
No family should be without some
form of life assurance. The early
death of a husband or wife can
impose severe financial burdens on
the surviving spouse. And for a
relatively small sum life assurance
can provide some protection and a
certain amount of peace of mind.
Remember, that even if someone
who lives to pay all the premiums
on a term assurance, and therefore
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