A LIFE ASSURANCE policy is a contract between an insurance company and an individual, where payment of a claim by the insurance company in return for premiums paid depends in some way on the duration of a human life or lives.

You can take out life assurance on your own life or the life of other individuals, such as your spouse or business partner, provided you can show that there is a financial relationship between you. A joint life first-death policy pays out on the first death of one of the lives assured. A joint life last-survivor policy pays out on the death of the last of the lives assured.

The size of the monthly premium will depend on the following factors:

  • The type of cover required - i.e lump sum or income
  • The amount of cover
  • The insured's age
  • The insured's sex
  • Whether the insured smokes
  • The length of the cover
  • The number of persons covered
  • The insured's medical history and current state of health
  • The insured's occupation

The benefit of a life assurance policy is that it guarantees that if a life-assured dies, the life company will pay out a cash sum. This money will be paid to the person paying the premiums or, if the sole life-assured has died, the proceeds will be passed into his or her estate and distributed according to the terms of the will. If there is no will, the sum will be handled according to the laws of intestacy.

It is recommended that life assurance policies be written under trust, as this will take the proceeds payable on death out of the estate, reducing the inheritance tax liability for the beneficiaries.

Term insurance

This is the simplest form of life assurance. Term insurance provides protection for a given period of time. At the end of the term (providing you have not died) you will not receive any money.

This is also the cheapest form of life assurance as there is no guarantee that a cash sum will be paid out, since nobody knows exactly when they will die. Life assurance for a person aged 30 will, on average, cost considerably less than for somebody aged 50, as the older client is far more likely to die within the term.

There are several options available with term assurance policies:

  • Renewable - on the end date there is an option to take out further term assurance without providing further evidence of health.
  • Convertible - at any time of the policy the term assurance can be converted to an endowment or a whole-of-life policy.
  • Decreasing - this term assurance is usually used to protect loan repayment such as a mortgage that reduces in value as the loan is gradually repaid.
  • Index-linked - the benefit level and the premium level increases in line with inflation or a set percentage each year.
  • Family Income policies - this term assurance pays a regular income, usually yearly, instead of a single lump sum. This is to replace the lost income of the deceased.

Whole-of-life policies

These policies pay out the benefit whenever the life-assured dies. This means that as long as premiums are paid, a payout will be certain. Because of this, premiums are more expensive than for term assurance.

You can choose a fixed sum assured, or one that is linked to the growth of investment markets. Those that are linked in this way are either "with profits" or "unit-linked".

With-profits policies collect all the profits made (the surpluses on the funds of the provider company after expenses have been met) and then distribute a substantial amount of that profit in the form of bonuses. These are normally paid annually and, once they have been added, cannot be taken away. They offer a very safe investment, which tend to smooth investment returns.

Unit-linked policies are increasing in popularity and are linked to the investment funds of the life assurance company, the value of which can go down in value as well as up.

How much life assurance is sufficient?

Most people need life assurance, but it becomes vital if you have a partner and/or children. In the tragic event of a death, the remaining partner would have to support the children and maintain the payment of other overheads - e.g. the mortgage - although there is less income. Add to this the extreme emotional shock of death and it is easy to see just how important life assurance can be.

Most people do not have enough life assurance cover; this is mainly because they do not know how much they require. Naturally, the level of cover is partially dictated by how much you can afford, but think about this question: if scaffolding fell on your loved one's (or even your business partner's) head, killing them, how much do you think the scaffolding company should pay out due to their negligence?

If you work for a large organisation, you may have "death-in-service benefits". Do check what life assurance you currently have.

The longer you delay taking out life assurance, the more it costs. Also, the costs vary between different insurance companies.

Be aware that life companies will "underwrite" the policy, which means that they may ask your GP for information. They may even want proof of your financial standing if you want high levels of cover.

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