Term Life Insurance - This is usually the cheapest form of life
insurance or protection cover insurance you can obtain and in recent
years premiums have dropped considerably and there is much competition
in the market. Why is it cheap? Well it only pays out if you
die. If at the end of the policy period you are still alive, the
contract lapses with no payout. Seems like a good deal doesn’t it, you
never get to see the benefit? That aside, this type of insurance
policy provides vital protection for your family if you die within the
policy term. If you do die the policy will provide an immediate cash
benefit. This type of policy offers pure protection cover and should
be considered before all other types of contract that will pay you out
an amount of money at the end of the policy term. (Such as an
endowment contract). Term life insurance or call it basic protection
cover if you like exists in a number of different disguises.
Level Term Insurance - this is the basic straight forward policy
which will pay out a fixed sum insured if you die before the policy
matures. It you choose a sum insured of £50,000 and you die within the
term of the policy your beneficiary will be paid out. The £50,000
would be paid out at any time throughout the policy period regardless
of how long the policy had been in force and how much premium had been
paid. If death occurs, the policy is paid up and no further premium is
required.
Renewable Term Life Insurance - this type of Term Life Insurance
gives you the right to increase the amount you are insured for at
various stages throughout the contract term, for example every 5
years. This facility is usually available if you can sign a
declaration for the insurance company stating that there have been no
new illnesses since the inception date of the contract. Of course the
amount you will have to pay each month will increase as you put the
sum insured up.
Convertible Term Insurance - this is a more flexible version of
the term life insurance policy and if you have this type of contract,
you will be able to alter the policy from its basic set up to either a
whole life policy or an endowment. This type of policy can be very
useful as if you convert to a Whole Life policy, the contract will
eventually pay out. The insurance company will not be able to treat
you as a new customer thus if you develop any illnesses in the ensuing
years, the insurance company will be unable to penalise you. Whole
life insurance polices is just that, they are for the whole of your
life and there will be a payout at the end. (Providing of course you
keep paying the premium or until such time as the insurance company
state that they no longer have to be paid). If you wish you can elect
to cease payments at a certain age (retirement age is fairly typical)
you will continue to receive the benefit of the policy on death but
the payout of course will be lower. If you decide to convert to a
whole life policy or indeed effect one at the outset, you can choose
between with profits and without profits. With profits whole life
insurance is of course more expensive but each year a portion of the
product providers profits are added to your policy and you payout will
increase. Without profits contracts are cheaper and the sum insured
will stay the same throughout the policy term unless of course you
decide not to continue with payments after a certain date.
Unlike normal term, life insurance contracts, whole life insurance
policies do have a surrender value and although in the early years any
surrender value will be very low, you can of course cash them in.
Other options would be to make them paid up or to sell them to a third
party company that may or may not offer you more money than the
product provider. In some cases, you can also rains loans against the
policy. Professional advice should always be taken before any
alterations are made to this form of policy
Increasing Term Life Insurance - with this type of policy the sum
insured increase over a period of time. This is usually up to 10% per
annum and this type of term life insurance is very useful if you are
worried about keeping up with the cost of living.
Decreasing Term Insurance - the name is a bit of a giveaway, As
the name implies, this policy reduces the amount of the payout as time
passes. This type of policy is popular for repayment of loans that
reduce over a period of time. It is not suitable for covering an
interest only mortgage which of course stays the same until it has run
its course.
Endowment Insurance Contracts - so much has been written about
endowment contracts over the last few years and most of it not
favourable. Most persons first experience of this type of contract
relates to the repayment of a mortgage loan but let’s explain the
basic concept first. An endowment is a savings policy with the added
benefit of Life Insurance included within the policy wording. The
policy is for a set term and will provide you with a guaranteed sum
insured if you die within the policy term. Each year a bonus is added
to the sum insured and this increases the payout at the end of the
policy term which should be higher than the basic sum insured. As well
as the annual bonus, the insurer may decide to pay you a terminal
bonus at the end of the contract term. The terminal bonus is usually
quite high and its payout is saved until the end of the contract to
prevent persons from cashing them in the early years. Low cost
endowments used to be a reliable way of paying off a mortgage loan.
Instead of taking a mortgage which paid back the interest and the
capital, you agreed with the lender to simply repay the interest only.
The savings you made by not repaying the capital amount of the loan
were passed on to an insurance company in the form of an endowment
savings plan. At the end of the policy term most insurers hoped that
there would be enough money within the policy to not only pay off the
mortgage but have a lump sum left over as well.
Alas endowments have not turned out to be a good way of repaying
mortgages, designed in years when we were experiencing high interest
rates, it was expected that they would easily provided the stated
payouts on maturity. We have of course been experiencing relatively
low interest rates for many years and thus insurers have not been able
to secure the anticipated growth. There have been many cases of
persons claiming to have been miss sold this type of contracts,
however anyone understanding the correlation between interest rates
and returns should have safeguarded against lower payouts by simply
paying the money they were saving on their monthly interest payments
in to a secondly savings account.
Endowments are a savings contract and can be also used for such things
as school fees but should always be considered as long term savings
plans. If you have to cancel the policy in the early years, you may
not get back what you have paid in, thus cancelling an endowment
policy should only be undertaken after much consideration.
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Copyright Assetsure Limited 2007
Guide to Expatriate
Life Insurance (Part 2) (