A quick refresher
In exchange for a regular, usually monthly, payment from you, life assurance pays out a lump sum on your death. The policy can be in force for the whole of your life (“whole of life assurance”).
Alternatively, it can be in force for a temporary period (“term assurance”). An example of the latter is a mortgage protection policy, which we deal with in a separate blog.
OK, term assurance – so a policy for myself for something like 20 years ?
Yes, this policy pays out on your death during this term. It could be 20 years, 30 years or until your retirement date. It is likely that your employer gives you such a benefit – e.g. a payoff of three times your salary to pass to your estate if you die whilst employed by the company before your retirement age.
A term assurance policy can be a single life policy – as above. Or It can also be a joint life policy – e.g. for a married couple. This policy pays out on the first death within the couple within the given term.
Also commonly available is a dual life policy which pays out on both deaths if they occur within the term. Certain insurers in the market are currently offering dual life policies at the same pricing as a joint life policy.
But what if the term of my policy expires just as my health deteriorates ?
Yes, this is a risk with term assurance. The monthly cost (premiums) of life assurance will be much higher than for healthy lives – which pay the normal premium. Renewing your life assurance will be expensive.
There is an option to purchase convertible term assurance. This allows you to extend the term of the assurance policy at ordinary rates for example, if your health deteriorates. The extra cost for this option is typically 5% to 10%.
A similar protective mechanism is an insurability option which gives the option to extend the term of the assurance on the occurrence of certain events – e.g. the birth of a child. This can be done irrespective of your health.
Do my dependents have to receive a lump sum on my death. I am worried about the stress of investing. Is there an option to replace my income directly upon my death?
In many cases, it is easier to quantify how much income per month your dependents would need rather than figuring out how big a lump sum would need to be.
A regular income benefit policy pays the regular income you require for your dependents from your death until the end of the term on the policy.
What other options are there with life assurance?
One risk with life assurance is that large increases in inflation can reduce the value of lump sum payments. An indexation option can be built in to index lump sum payments (and premiums) to inflation.
Other options and add-ons that can be built in include serious illness cover, cash payments if hospitalised and waiver of premium (no need to pay premium if unable to work).
It is also possible to have proceeds paid to you on the death of another (life of another life policy). This is often used by businesses to allow surviving partners to buy out the shares of deceased partners and to provide tax-free cash flow to the next of kin of the deceased. Find out more here.
For help in understanding life assurance options, please don’t hesitate to contact us at AM Financial.