Types of Life Assurance

Term Life Insurance

Term insurance is, as the name suggests, a policy which only pays out if you die within a specified term. This could be 10, 20, or 30 years from the date the policy commences.

This is the simplest type of life cover, and it usually demands that you pay a premium on some sort of regular basis in order to be covered. The amount of that premium depends on both the amount of money you have agreed as the death benefit and the statistical likelihood you will die. You are effectively gambling with the Life Company on whether or not you will die during a certain period. If you die you "win" and someone gets the payout. If you don't die you "lose" and you get nothing at the end of the insured period because you are still alive. This is one bet we all want to lose.

Term assurance is generally low cost and is expected to fall over time barring a major impact disease.
Just because nothing involving insurance can ever be simple, there are several main types of term life assurance. The first, level term, is the most commonly advertised. This is a form of term assurance that locks in the premium costs for as long as you hold the policy i.e.: you pay the same amount throughout. It means you may appear to pay over the odds each month when you are younger, but that is balanced by savings on the "real" cost of premiums as you get older. You also get the benefit of paying at today's prices. As the real value of your premiums erodes in future, you make substantial savings.

Other types of term assurance include:

• Escalating term assurance: these schemes demand you pay more each year, so the amount you would get at death goes up. They tend to be cheap when you are young and healthy but more expensive as you get older.
• Increasing term assurance: you increase the amount of death payment at set times or whenever you choose (such as when you have a child). Obviously you then have to pay more each month. A better alternative is renewable term assurance -- you can get this option built into some ordinary level term assurance plans. It allows you to take out a new term assurance plan when your original deal ends, regardless of your state of health at that time.
• Decreasing term assurance: this is mortgage protection type assurance. The monthly payments stay the same, but the amount of cover you get for that goes down every year. This sort of insurance is sometimes sold alongside a repayment mortgage, and the death benefit drops in line with the amount you have left to pay off on your loan. It's also useful for parents -- as your children grow up and leave home, you will only need to insure for a smaller amount of death benefit.
• Convertible term assurance: here you can convert the term assurance aspect of the policy to a whole of life (non term) investment assurance policy at any point in the future before term end. The beneficial point is that the price of your future investment policy is based on your health when you bought the cheaper premiumed term assurance.

Whole of Life Policies

When you buy a whole of life policy, it covers you right up until death -- whenever that may be. Provided, of course, that you keep paying in the premiums.

This type of policy is more expensive than term assurance as you would expect and more complex. The money in your account earns some interest each year. Depending on how fast that grows, your annual premiums can actually go down over time, and there may come a stage when the interest on your savings will cover all your premiums so there's nothing more to pay.

The cash-in-value of this type of policy may or may not be equal to the amount of money you have paid into it over the years, depending on the investment.

You need to make your own decision about what sort of life cover you think you need. The simplest kind is a level term assurance policy with a renewable option so you've got cover for as long as you need it. Ultimately you may just want a lump sum to be payable to your dependants should you die at an inconvenient time.

Which is best, term or whole of life?

If the need for life cover is for a fixed term such as while your children are growing up, then choose term insurance.
If the need may turn out to be longer, look at a longer term or go for a renewable or convertible term plan.
If the need is for the whole of your life, then choose whole of life.

Unit Linked Policies

A Unit Linked Policy is a life assurance policy that is linked to an investment in funds for the purpose of building up savings coupled with the life protection.

The investments can be in shares, State fixed-interest bonds and property. A certain number of units are purchased in the fund with your investment. A Fund Manager manages the fund which can go up or down in value, depending on the changes in the value of the underlying assets. The principal difference between a Unit Linked Fund and a Unit Trust is that the Unit Linked Fund has the assurance policy attached to it.
Depending on the degree of acceptable risk, an investment mix ranging from a spectrum of a zero risk fixed interest fund to for example a high risk Japanese equities fund, with much to choose from in-between, can be recommended to the investor.

The 3 categories of Unit Linked Funds are:

• Secure Funds (low risk) where investments have 100 per cent security (short of a collapse of the financial system).
• Balanced Funds (medium risk) these investments are made in a wide range of domestic and overseas assets, with the objective of achieving enhanced capital growth.
• Specialist Funds (higher risk) These investments are made in a specific asset, e.g. shares or property; or a specific region e.g. Ireland, UK, US, Ireland to achieve high long-term growth.

With Profits Bonds/Policies

The decline in equity returns is prompting life assurers to consider withdrawing from the 'with profits' product market.

Investors in with-profits policies, such as lump sum with-profits bonds or regular payment endowments, receive two types of bonus. Once paid, an annual bonus cannot be taken away provided the policy is held to maturity. However, insurers are under no obligation to pay any terminal bonus, whatever the estimates that are given in annual policy statements. Some life companies have cut these bonuses four times last year and the reductions are having a significant impact on maturity values. The penalties for surrendering policies early have also been increased.

The life insurers "smooth out" bonuses in the good years so that payments can be made in bad return periods. However, the sharp decline in equity values has prompted the steep fall in bonus values.

The stronger the financial position of the life company, the greater its ability to weather downturns in the market.

The popular benchmark of stability, the 'free asset ratio', which expresses as a percentage, the ratio of excess assets in with-profits funds to cover liabilities, is not considered to be reliable as there is no standard for determining a company's future liabilities. The Association of UK Insurers has recommended that life companies provide independent credit ratings, similar to Standard & Poor's or Moody's, the rating agencies, with all annual statements sent to with-profits policyholders. However, things are seldom simple. Some actuaries warn that credit ratings could give investors a false sense of security as Equitable Life had a good rating up to the late 1990's.

The U.K. industry regulator, the FSA, has warned life companies to exercise caution in bonus declarations in 2002, to avoid imperiling prospects for policyholders in future years.

With-profits funds are mainly invested in the stock market. So a poor market cannot be escaped from. The smoothing range is generally between 95 to 105 per cent. So the payout can actually be 5 per cent greater or less than what your investment has actually earned.

In this year 2002, the impact of a number of years of declining stock market returns is very evident. In the U.K. for example, Scottish Widows is paying out £75,004 Sterling on a 25-year, £50 Sterling a month endowment, down from £91,538 Sterling a year ago - an 18 per cent change. Norwich Union has reduced its payout by 14%. It smoothes in the range 90-110 per cent. However, 2 years of falling stock market returns, prompted it to reduce its 2002 payout by more than 10 per cent compared with 2001.

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