Insurance, we believe, is something to approach from the angle ‘could I do without it?’ For example, straightforward life assurance may be of limited value to a person with no dependents, but might be seen as essential for the self-employed owner of a small business with three young children.
It is an enormous subject, where there are few right and wrong answers unless you are looking backwards in time. Think hard and take advice!
What is life insurance?
Life insurance offers financial protection in the event of your early death and can also be a means of saving. This combination of protection and saving makes life insurance unlike any other financial product.
Although dearer than protection insurance alone endowment insurance both protects and saves for the future. Endowment policies can be issued on a with-profits or unit-linked basis.
You pay premiums for an agreed number of years, say 10, 15 or 20. At the end of this time you receive a lump sum, which is either the sum insured together with bonuses in the case of a with-profits policy, or – with unit-linked endowments – the return of all money invested together with the investment growth.
If you die before the maturity date the insurance company will pay the sum insured, or the value of the policy at that time if greater.
A with-profits fund
A with-profits fund is a pooled investment, where the money you pay in (the premium) is pooled with other premiums and invested by the insurance company in assets that will include stocks and shares, bonds, government bonds, property and cash.
Any investment growth achieved by the with-profits fund is paid to you as regular and final bonuses and added to your policy. Once bonuses have been added, they cannot usually be taken away. It smoothes out fluctuations in the value of investments, although there is no guarantee of the final (maturity) value of the policy.
With-profits bonds are another way of investing in with-profits funds by paying a single premium.
With a unit-linked policy there is no guaranteed sum insured payable except in the case of death. The insurance company invests your premiums in specific funds chosen by you.
The amount payable under your policy depends on the value of the investments in those funds at the time your policy matures. Insurance companies offer a range of different funds to which your policy can be linked. You should ask for an explanation of the different funds so that you understand the different risks and opportunities.
There is no guarantee of the value of the sum to be paid on maturity. The potential benefit from a unit-linked policy can be greater than from a with-profits policy, but there is also the risk that the eventual benefit could be lower. The value of investments can fall as well as rise.
A bond is an investment usually purchased with a single premium lump sum, although regular payments can sometimes be made. Your payments are invested by the insurance company either in its with-profits fund or as a unit-linked investment where you can choose the fund it is linked to.
Waiver of premium – If you cannot follow your normal occupation because of illness or injury, the insurance company will pay your premiums to maintain the benefits under the policy.
Critical Illness – This provides cover against the risk of you having a serious illness such as a heart attack or cancer. If you develop one of the illnesses listed in the policy a lump sum (or occasionally a regular income for a set period) will be paid. This type of insurance can be bought on its own or as an addition to whole life, endowment or term insurance.
Qualifying policy – This means that the benefits paid on death or maturity are not subject to income tax. To qualify, a policy has to satisfy certain statutory conditions.
These include the need to pay premiums at annual or shorter intervals for at least 10 years or until your earlier death. Your sales person, adviser or insurer will tell you whether or not your policy is a qualifying one. The surrender of a policy within the first ten years may result in a liability to pay some income tax.
The information which we provide through Lasting Post is in outline for information or educational purposes only. The information is not a substitute for the professional judgment of a solicitor, accountant or other professional adviser. We cannot guarantee that information provided by Lasting Post will meet your individual needs, as this will very much depend on your individual circumstances. You should therefore use the information only as a starting point for your enquiries.