The Gazette 1989

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

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

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. 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

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. 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

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