Life Assurance

Many people see life assurance as a low priority – according to recent research, it’s much less important than a smartphone. But if you had died three weeks ago, how would your dependants be coping with the loss of your income? Would they have enough money to maintain their lifestyle? Or would they now be worrying about money and making sacrifices?

Almost every modern life assurance policy is a non-investment product: like other insurances, it yields nothing unless there’s a valid claim. Whilst this may seem unattractive, ‘pure protection’ policies are generally more affordable and have lower charges than their more complex investment-based counterparts.

Term assurance is written for an agreed period and pays the agreed benefit if death occurs while the policy is in force. Most policies pay benefit immediately if the life assured has a confirmed diagnosis of terminal illness.

The assured benefits under decreasing term policies reduce year by year, almost negligibly in the earlier years but more rapidly as the years progress. Premiums don’t usually reduce, but are lower than for non-decreasing policies. This makes it a suitable and economical way to protect a repayment mortgage or similar reducing liability.

Level term assurance pays the same agreed benefit whenever death occurs during the term of the policy. It’s therefore most suitable for providing a sum of money for dependents’ financial security following the death of a breadwinner, and/or for discharging an interest only mortgage.

Family Income Benefit is a hybrid. Instead of a lump sum benefit, death benefit is paid as a pre-agreed annual income, but only for the remainder of the term – thus decreasing the assured benefit year by year. Nevertheless, this type of policy is a suitable way of providing a temporary replacement income in case of death (for example, to meet a specific need such as university costs). Most FIB policies allow the income benefit to be exchanged for a single lump sum if the bereaved dependants so wish.

Many people rely on their employment benefits, such as death in service benefit, instead of arranging their own protection policies. However, employment benefits are lost as soon as the employee leaves the employer’s service – and age or health may make it difficult to arrange affordable replacement cover.

Rising house prices have lifted many ‘ordinary’ people’s estates above the inheritance tax threshold, and legal changes are making it increasingly difficult to avoid IHT. One solution is to arrange life assurance, choosing a sum assured sufficient to meet the expected IHT liability. In this case, a term assurance is inadequate. A whole of life policy will ensure benefit payment whenever death occurs. For married couples and civil unions, a joint life policy paying benefit on the second death (when the IHT liability would normally arise) is a surprisingly economical option.

Of course, any life policy would be self-defeating if the death benefit created or added to an IHT liability. For this reason, among others, life policies are often written in trust. Benefits are outside the estate, free from IHT, and can quickly be made available to dependants even if probate is delayed.