October 21, 2006
Life Assurance Basics - Step 1
Background
Arranging life assurance cover is the best way to ensure your family is taken care of in the event of your death, giving both you and them peace of mind.
Life assurance, put simply, is a policy provided by an insurance company that pays your family either a lump sum or a series of smaller sums in the event of your death. Policies vary widely; some plans last the whole of your life, whereas others expire after a certain period of time. Some have premiums and payouts set in stone, while others offer more flexibility.
There are many factors to consider when choosing a life assurance policy:
- What sort of cover do you need?
- How much cover should you arrange?
- Do you need basic life assurance or more extensive critical illness cover, and what about tax?
It is extremely important to know the terms and conditions of your life assurance policy. In many cases, a policyholder's personal circumstances may change during the term of the policy, and so the current premiums or the eventual amount of the payment may no longer be appropriate.
While a policyholder's personal circumstances may be likely to change, the economy itself is guaranteed to do so, and a policy taken out 20 years previously may simply no longer cover all contingencies. Some companies offer the option of index-linked policies, in which the guaranteed payout and the premium payable are linked to the Retail Price Index and rise alongside it each year.
Furthermore, policyholders must be aware of all the rules and regulations relating to payouts. Some policies may not, for example, pay out if death is caused by participation in certain dangerous sports or activities.
Other Issues
People who receive life assurance as part of an occupational pension scheme (such as the NHS) need to ensure that cover is maintained if they leave that place of employment, or a new one should be started in its place as soon as possible (if required).
Life assurance is not merely the sole province of the 'breadwinner', or the person who earns the largest salary. For a family with young children, the spouse providing the bulk of the childcare performs a function that, in the event of their death, costs the family a great deal to replace with outside help.
A family that loses a stay at home partner/spouse may, for example, have to hire a full-time live in nanny to provide the same sort of care, and will have to provide relief cover as well for evenings, weekends and holidays.
A joint life policy is a popular and often less expensive option for couples which covers the two of them simultaneously. This type of policy may be in a first death form where the benefit is paid out on the death of the first of the two to die to the surviving partner, or a last survivor form, where the benefit is paid to the beneficiary, usually the children, after both partners die (often used for inheritance tax planning).
It may be more beneficial to apply for two individual policies rather than joint cover, as you will benefit from having a possible payout twice. In addition, it often makes it easier to place individual plans under trust.
Who is Covered?
Most commonly, policyholders will name their spouse and/or their children as beneficiaries of their life insurance, with other family members an option for the unmarried and childless. Beneficiaries are not limited to family - a business partner is also a popular option.
Spouses may also take out life of another policies on each other; a husband may take out insurance on the life of his wife, and vice versa. Life of another policies require that you prove an insurable interest in the person whose life you are insuring; however, spouses are assumed automatically to have an insurable interest in each other’s lives.
In a few days we'll look at deciding how much cover you need.
Filed under Protection by Ray Prince
