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Whatever your need we cover it: The following represents a summary of the differing types of cover available through coverdirect.net
Mortgage/ Loan protection (Term Insurance)
Term assurance is the most basic type of life assurance. It is a means of insuring against death within a specified period. The lump sum paid on death is not liable to income tax or capital gains tax. The sum assured will usually be paid into your estate, unless the policy has been written in trust which case the payment can be made directly to the beneficiaries. If the policy has been assigned to anyone, eg your bank, the payment will be made to the assignee.
Level Term Assurance This is the basic form of life assurance, the cover is for a specified period and there is normally no surrender or cash in value. The life office will only pay out the sum assured in the event of your death during the term of the policy.
Decreasing Term Assurance This term assurance provides a sum assured which reduces each year by a stated amount or percentage, to nil at the end of the term. This is normally used to provide cover on a repayment mortgage where the life office will pay out a sum equal to the capital outstanding under the mortgage. The premiums remain constant throughout the term of the policy, although they are usually cheaper than a level term assurance policy.
Increasing Term Assurance It must be borne in mind that due to the effects of inflation, a level sum assured gives a reducing amount of life cover in real terms. To counteract the effect of inflation it is possible to effect a policy which will provide an increasing sum assured. This can be by:
Renewable Term Assurance At the expiry of the initial term of the policy, the ‘renewable’ option enables you to take out a further term assurance at ordinary rates without evidence of health. This is usually subject to the expiry date not going beyond age 65. Each subsequent policy will have the same option, eg a 5 year renewable term assurance gives you the option of renewing every 5 years. The premiums for the subsequent policies will be based on you age at that date.
Convertible Term Assurance This is a level term assurance policy with an option which enables you to convert it, at any time during the term of the policy, to a whole life or endowment policy without further evidence of health.
The main reason that life cover is normally required is to replace the income of the individual in the event of premature death. The way that an income is provided, in most cases, is from the investment income generated from the lump sum provided by the life policies. Most people have difficulty assessing the amount of life cover that is realistic for their family protection. Whilst this is a very personal matter and is dependent on the number of dependents, their income requirements, and how long the income is to be maintained, many people require some guidelines as to where they should start.
The amount of the investment income produced will have a significant effect on the size of the lump sum required. If an income is to be maintained long term, and that level of income is required to rise roughly in line with any effects of inflation, then it has been necessary to invest in "asset backed" investments, such as Equities (via stocks and shares, unit trusts, etc.)
Whilst the income element of asset backed investments may be less, in some cases, initially than the income from an interest bearing account, the income in real terms has historically increased over time, whereas the income from interest bearing accounts has not shown the same levels of increase.
It is
important that you use the rate in income drawdown that you feel is
appropriate to your own personal feelings however, as a guide, you should
be aware that a typical asset backed investment would yield around 5%
Gross per annum.
IHT: Policy can be written in trust to enable the proceeds of the policy to be free from inheritance tax.
A key person in an organisation is an individual whose skill, knowledge or leadership contributes to the company’s continued financial success, eg managing director, sales manager, computer specialist. It is anyone whose death could lead to a financial loss for the company. The death of a key person in a small company can be disastrous. With Key Person Cover a policy is taken out and owned by the company on the life of the individual. The premiums are paid by the company and in the event of death (or illness) of the life assured the policy proceeds will be paid to the company. To ensure that the appropriate type of cover is effected we recommend that the company consider the length of the period of cover, the risks they wish to be insured against, eg death, critical illness, PHI, and the sum assured. There are no formal rules for arriving at a sum to be assured and it is not easy to accurately assess the financial impact on a business of a future event.
Taxation
Short Term Assurance (5 years or less)The premiums paid by the company may be allowable for Corporation Tax relief, however the company should check with their inspector of taxes. Where the keyperson is a controlling director it is unlikely that tax relief on premiums would be available. The proceeds of the policy will form part of the company’s income and liable to taxation.
Longer Term Assurance, Whole of Life or Convertible Assurance Premiums will not qualify for corporation tax relief. The company will only be taxed on the chargeable gain, ie. the surrender value immediately prior to death less the premiums paid.
This provides cover in the event that you are unable to work through illness or accident. It provides a regular income which can be paid weekly or monthly to replace the lost income. As the long as the premiums are paid to date the insurance company cannot cancel the policy or increase the premium no matter how many times claims are made.
PHI providers stipulate a maximum level of income benefit they will provide, which may vary up to 75% of income. Income is taken as the average monthly earnings of the insured in the year prior to disablement. State sick pay and disability benefits will be allowed for in calculating the 75% limit and benefits from other PHI policies will be taken into account.
The benefits start at the end of an initial waiting period, which may be 4, 13, 26 or 52 weeks long. The benefit is payable until the policyholder returns to work, dies or the policy term expires, whichever is the earlier. In the event the insured is able to return to work but only on reduced earnings due to being able to work reduced hours or take a less well paid job, it is possible for a proportionate payment of benefit to be made. Insurance companies will usually have limitations on payment of benefits if you reside or travel abroad.
Premiums may be guaranteed from the outset or they may be reviewable. Reviews may be carried out after a fixed initial period, eg 5 years, or annually.
OptionsLevel Cover: Premiums and income payments remain level thoughout the period of the policy.
Increasing Cover: Income payments will automatically rise each year and the premiums will increase in line with the benefit. Such increases can be at a fixed rate, usually 5%, in line with RPI or in line with NAE, depending on the provider.
TaxationThere is no tax relief on the premiums. The benefit payments are usually free from income tax.
Critical illness cover is available as an add-on option on term assurance, whole of life and endowment policies or as a stand alone cover. The policy will pay the guaranteed sum assured upon the diagnosis of one of the specified critical illnesses and disabilities covered by the plan. The range and definitions of illnesses covered will vary between life offices, but will invariably include: · cancer · strokes · coronary artery diseases · heart attacks · kidney failure · organ transplants · loss of hearing · loss of sight · multiple sclerosis · Parkinson’s disease
Full details of the conditions will be contained in the insurance company’s literature.
If a claim is made the life office will require medical evidence to be produced that a critical illness has been diagnosed and there may be qualifying time periods for certain conditions.
Under current legislation payment of the sum assured is made free of income and capital gains taxes.
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