What is Term Assurance?
Simply put, term assurance is an amount of life cover that will be paid out on death in a specified term, meaning it does what it says on the tin! For example, if you insure your life for £100,000 over a 10 year term, and you were to pass away during those 10 years that the policy is in force, the beneficiaries would receive £100,000 in a lump sum.
You need to remember though, If you cancel the policy during the term, therefore bringing it to an end, there will be no value returned to you for the premiums that you have paid.
This is arguably one of the cheapest forms of life cover, and it can be used for many things such as providing a lump sum of money to a loved one or the family, or it could be used to protect a debt which is not due to be repaid for several years.
Decreasing Term Assurance
Term assurance plans have quite a few variations available, for example ‘Decreasing Term Assurance’. The best way to explain decreasing term is by example. If you have a policy in place for 25 years, with a sum assured (this means the amount it will pay out upon death and/or critical illness) of £100,000, the policy will reduce every year over the next 25 years down to zero.
This type of product would typically be used to protect a residential mortgage which is on a ‘repayment basis’. For example, a mortgage of £100,000 which is due to be repaid over the next 25 years, will gradually reduce as payments are made each month, and as a result the sum assured that you require to repay this mortgage also decreases in line with this. The policy is designed to repay whatever balance is outstanding at the time.
Term assurance cover can be written as a ‘single life’ policy (this means the life insured is just one singular person), or it can be written as a ‘joint life’ policy (this is where you may wish to insure more than one person, for example if a mortgage is in joint name, you may wish to insure both of you so that in the event one of you passes away, the other is provided with a lump sum to pay the remaining mortgage and release that financial burden).
Family Income Benefit
Another form of term assurance is ‘Family Income Benefit’. This type of policy would pay a monthly benefit to your family if you were to die, for a certain amount of time, instead of a lump sum. For example, if you were looking to protect your partner and children in the event of your death (because your monthly/annual income would cease), you can implement a policy for 20 to 30 years, and in the unfortunate event that you pass away, your partner would receive a monthly income of a certain amount a month. This would allow your partner to continue to raise the family without any financial stress or burdens.
Quite often family income benefit enables you to add a further feature, whereby the monthly benefit payments would increase, therefore keeping the policy relevant to your earnings today and in the future, which protects your family against the increased cost of living.
Waiver of Premium and Terminal Illness Benefit
Another common feature that is available on term assurance policies is to add what is referred to as ‘waiver of premium’. This means that if you are ill and unable to work for a certain period of time, the insurance company would no longer charge the monthly premiums for the policy until you had recovered and were back at work. An advantage of this is if you are looking to save costs and you are tempted to cancel your life cover following illness, especially at the time when possibly you may need it the most, you no longer need to worry about it.
In addition to Waiver of Premium, most modern term assurance policies have an additional ‘terminal illness’ benefit attached to them, whereby if you produced the necessary medical evidence, the insurance company may pay the claim early and that would help you put your affairs in order at that time.
In article 3, I will be looking at Whole of Life cover. I know you can’t wait!
- If the sum assured is fixed, the value of the sum assured will be reduced in real terms by inflation (unless the plan includes indexation).
- If premiums cease to be paid, clients may suffer loss of cover.
- Clients may pay more in premiums than the amount of the sum assured, depending on how long they live.
- Clients should be aware that different providers underwrite risk differently. This may lead to certain policy exclusions or amendments in policy terms. Clients should familiarise themselves with policy features & benefits prior to entering any contract.