Life Assurance

Life assurance is an essential cover if you have dependants, such as a spouse or children, who would need financial support if you were to die unexpectedly. Cover can be taken out for a variety of purposes but comes in two main guises – term assurance and whole of life assurance.

Premiums for all types of life assurance are based on a number of factors such as your gender, health, lifestyle, smoker status, age and occupation. The lower the likelihood of you dying during the term of insurance, the cheaper the premium will be. Under most term assurance policies, the premium is guaranteed to remain the same for the term of the policy.

It is extremely important to take independent financial advice before buying life cover so that you can ensure that the policy is fit for purpose. This will also provide you with the protection of the Financial Ombudsman Service if something goes wrong, which is not the case if you buy without advice.

Term Assurance

Term assurance will pay either a lump sum or an income if you die during the term of the policy, which can be anything from five to 40 years. However, there are age limits placed on when the cover can be taken out and when the policy must cease.

Policies can be arranged on a joint or single life basis. If death occurs outside of the term of the policy, there is no payout.

The level of life insurance required will depend on your individual circumstances, but generally speaking it should be at least enough to pay off major debts, such as your mortgage.

There are four main types of term assurance:

• Level term
The amount of cover remains the same throughout the term of the policy and these policies are normally used to cover an interest only mortgage or to provide family protection.

• Decreasing term
The sum assured reduces each year, decreasing to nil at the end of the term. The cover can reduce by a fixed amount each year, or in line with the outstanding balance of a repayment mortgage, to match the reducing debt.

• Family income benefit
This type of policy is ideally suited to provide your family with a replacement income if you die during the term of the policy. A regular income is paid to your dependants for the remainder of the term of the policy.

This can be a useful way of providing a partner or spouse with a monthly income to pay for essential outgoings, such as council tax, utility bills, child care and so on. If you pay school fees, you may wish to factor in this cost as well.

The income can be paid monthly, quarterly or yearly. Some policies provide an income which increases each year at with inflation or at a fixed rate, such as 5%.

• Gifts inter vivos policies
These policies are designed to cover the potential inheritance tax liability that can arise if you bequeath assets or gifts to someone from your estate while you are alive.

Such a gift is called a potentially exempt transfer (PET) because the liability for inheritance tax (IHT) tapers off over seven years. A gift inter vivos policy last for seven years and is specifically designed to cover the tapering liability should you die during this period. For more information on Inheritance Tax, please see the appropriate section.

Whole of Life Assurance

This is more expensive than term assurance because it will pay out on death whenever it may occur. Whole of life assurance can be useful if you have dependants whom you wish to protect irrespective of when you die.

Premiums are typically reviewed after ten years followed by five year intervals and may well increase depending on the type of contract. While they are more expensive than term assurance, whole of life policies can be useful in certain circumstances and are often set up under trust as part of inheritance tax (IHT) planning so that your beneficiaries can receive a lump sum to pay a potential IHT bill.

Putting Policies in Trust

Although life assurance benefits are designed to be paid free of tax when you die, under certain circumstances, the proceeds could form part of your estate and become liable to inheritance tax, if the policy is not written in a trust. Placing a policy in trust means that the proceeds can be paid directly to your beneficiaries, rather than having to go through probate and being taxed when you die.

Estate planning and writing policies in trust can be complicated, so taking from us is essential.