What Type Of Life Insurance Is Right For You?

The two simplest products are level term assurance and family income benefit. The term assurance lump sum can be invested to provide an annual income and/or used to pay off debt, while family income benefit can directly replace the shortfall in annual income.

Most life assurance policies work on the ‘you drop dead, we pay up’ principle. However, some companies offer whole of life plans which combine insurance and investment by deducting the cost of life cover from your savings plan. You can discuss with your life planner about how many life insurance policies can you have? So that you can choose what’s best for you and if it is beneficial for you to get more than one life insurance policy.The following descriptions explain your basic options.

Level term assurance

This provides a tax-free cash lump sum if you die within the period insured. However, if you die the day after the term expires you get nothing. Unless the policy is assigned to cover a specific liability – for example, your mortgage debt – it is sensible to write it under trust so that the lump sum does not form part of your estate if you die. In this way the policy proceeds could be passed on to your children, for example, without having to wait for probate to be granted to your executors.

Life assurance can be written on a single or joint life basis. A joint life policy covers more than one person – typically a husband and wife. It may be written to pay out if just one of the spouses dies (‘joint life first death’) or only when both have died (‘joint life second death’). Experts reckon that in most cases it is better – and only slightly more expensive – to arrange individual policies. However, joint policies can be useful in inheritance planning so that the sum covers the bill for inheritance tax that your children might otherwise have to pay when the second parent dies. Term assurance comes in other forms.

Convertible renewable term assurance gives you the right to extend the insurance period without further medical underwriting or, in some cases, to convert to an investment linked plan. The former can be useful if you need to increase your life cover when you are older. Generally you would be asked to undergo a medical and could pay much higher premiums if you are not in good health.

Decreasing term assurance reduces at regular intervals and can be used to protect a debt which reduces in a similar way – for example, where the outstanding debt decreases over the loan period at regular intervals. However, repayment mortgage protection insurance is structured in a slightly different way to accommodate the specific pattern of the capital debt reduction.

Decreasing term assurance can also be used as a means of covering an inheritance tax (IHT) liability where you have transferred assets to someone other than your spouse (known as a ‘potentially exempt transfer’) and there would be a reducing IHT liability if you died during the seven years following the transfer. Remember, the insurance need only cover the potential tax liability – that is, a maximum of 40 per cent of the asset value in excess of ┬ú250,000 (in 2002-2003) – not the whole of the gift.