Ok, so life assurance (as with many insurance products in recent years) has not always had good press and many people are not only wary of it but feel that it somehow throwing money away. However, the main reason for this is that people generally do not understand a few basic facts about life assurance and often get it confused with other things or get confused with the options available. This is not helped by the vast array of companies offering cover and all the different marketing and media messages we see every day.
To put it simply, straight forward life assurance will pay out a lump sum if you die within a certain timescale. You may set life cover up to pay your mortgage off if you die or even just to leave a lump sum to your family. There are many options available though, which I will attempt to explain in basic terms here;
1) The term of the policy - you can opt to have the policy running for pretty much whatever term you like, this could be as long as your mortgage term (for instance, 25 years) or it could be up to your retirement age or up until an age where you feel your children would no longer suffer financially if you were to die. The only real restriction on this can be that if you cover yourself until you are quite old this will cost you more (as the chance of your death statistically inceases as you get older, so you are more likely to die within the policy term). Whole of life policies do exactly as they suggest, obviously again your monthly premmiums would be higher on this type of policy that on one just covering you for say 15 or 20 years.
2) Level / decreasing term - many policies will allow you to choose whether ytou would like a level term or decreasing term policy. Put simply, the decreasing term option is cheaper and is designed to have a decreased amount of cover each year in line with your mortgage balance (so is only really any good for covering a mortgage balance on a full repayment type mortgage). the level term option will cost more, but if you choose cover of say £100,000 then that is what it will pay out if you die within the term, wthere that is 2 years or 20 years into the policy.
3) It is not an investment! - normal life cover is not designed to give you a pay out if you do not die! Like car insurance you will pay a premium every month and if you die within the term you can claim (or your family can) but if you do not die then you get no money back (but hey, you are still alive, so that's a bonus!). Some investments, such as some ISAs offer life cover within the investment, do not confuse these with normal life cover. You are paying for the peace of mind that if the worst happened your family would be ok.
4) Options - on some policies with some companies you can opt for extra cover for illnesses etc. Critical Illness Cover (CIC) means that your policy would pay out if, for example, you were to discover you had cancer, or if you had a heart attack. You can add this on to a life cover so that the one policy would pay out either upon death or if you contract a specified critical illness. However, the word 'specified' is very important, every CIC policy will be slightly different but they will only cover for certain things, for instance some may only pay out for certain types of cancers, or would not pay out if you had a mild heart attack which you quickly recovered from. Also, this cover can be very costly, that is not to say that it isn't worth having, it certainly is, but it will not be within everyone's budget and obviously you need to ensure you can afford to keep up the payments each month for the policy term. You can also sometimes have the option of adding cover which will pay you a monthly amount if you were off work for a long time (say if you had a bad accident or had a long term illness), you could use this to cover your mortgage payments or to cover even more than that so you had a bit of extra income also (especially useful if you would only get statutory sick pay from work). Again this can be costly and you must check for exclusions, for instance it may only pay you for up to 12 months. Waiver of preimum is another option, which allows your policy premiums to still be paid if you are off work ill. With any additional options it is important to weigh up both how important that cover is to you and whether you can afford it, as well as checking all the small print and asking for clarification where necessary.
5) You will usually pay monthly by DD - some policies allow you to make a lump sum payment, whereas most need you to pay monthly by DD, this means that you will be paying whatever your monthly premium is every month for the entire policy term. So if your premium is £10 per month for a 20 year policy you will have paid £2400 by the end of the policy term - this may seem a lot, but remember this is peace of mind you are paying for and so it is not really 'wasted' money if you do not die within that policies term! Do check if your policy gives you the assurance that your premiums will remain the same throughout the term too, don't let yourself have a nasty surprise a coulple of years in when they hike the monthly premium up!
6) You will need to mention any life cover if you make a will, you can also arrange your life policy to go 'in trust', ie so that the money would go to someone specific if you were to die.
7) Premiums vary hugely - not just from company to compnay but depending on many factors......Age, policy term, type of policy, options chosen, amount of cover needed etc. Ideally we would all have every type of cover available, for millions of pounds, but you need to prioritise what is important to you, what your budget is and go from there. Many basic policies are as cheap as £5 a month, or even less, but they can cost hundreds a month!
I hope this clarifies a few things. Life cover is not right for everyone but in most cases someone would suffer financially if you were to die (your spouse, your children or even your parents if they are left to sort out your affairs) and this type of policy allows you to ensure that in such an event at least they did not have money worries to battle with along with everything else.
With-profits insurance policies have had a bad press recently. People have found that, when it comes to payout time, after twenty or more years of faithfully stumping up their premiums, they are getting a lot less than expected. And, in the future, things could be worse. You could be in danger of missing out on a hidden ‘cash stash’ that has come from all those premiums you (and countless other policyholders) have been paying into your with-profits insurance policy over the years. What's the problem? And can you do about it? About £350 billion is held in with-profit insurance policies on behalf of 10 million customers in the UK. What we policyholders get from this vast sum is life insurance, 'reversionary bonuses' which are usually added each year, and a 'terminal bonus' which is added when the policy matures. We can know, by looking at our policy, how much our life is insured for, and we can know how much we have accrued in 'reversionary bonuses' because our company should send out a statement every year. (Mine, the Scottish Provident, does.) But what we don't know is how much the terminal bonus will be worth. The problem is that insurance companies use arcane and abstruse means of calculating the terminal bonus, methods which only a few understand. So we are at their mercy, here. We policyholders are at their mercy in another area, too. Most of these insurance companies have accumulated huge surplus funds over the years, funds which they call 'orphan assets' (technically defined as that part of the fund not required to meet liabilities, including policyholders reasonable expectations). The companies call them orphan assets because no one can say who owns them. But these orphan assets have come from generations of policyholders' premiums. So, who do you think should own them? Because these orphan assets are 'surplus to requirements' many i
nsurance companies are currently looking at ways of clarifying ownership and then distributing them. There is a danger that, unless the Financial Services Authority settles the question of ownership, it will be the company shareholders, not the policyholders, who will get their hands on the bulk of these assets. This is, in my opinion, nothing less than legalised theft. Anyone can be a shareholder with a quick phone call ... and can be equally quickly out again. Here today, gone tomorrow with a fast buck. Policyholders, by contrast, are locked into a long-term commitment from which the insurance company draws its strength. Get out of your policy too early and you lose heavily ... but heavily. This is a big issue for investors in with-profits funds. We long-term policyholders could lose a lot here. What can you do about it? the first thing is to write a letter to the Chief Executive of your insurance company asking for clarification on the company's policy. Here's a sample you could cut and paste as a template ... ====== Dear Mr/Ms (Managing Director’s name), I am writing to enquire about the status of the surplus funds commonly known as 'Orphan Assets' that your company (company name) may hold. By 'Orphan Assets' I mean the surplus funds which are not required to meet liabilities, including policyholders reasonable expectations. I believe that questions of ownership hang over these funds. As I understand it, these funds have been generated from the premiums of policyholders both past and present and, as a with-profits policyholder of (Company name) for (however many years), I would very much appreciate clarification on your company's stance with regard to these funds. Specifically, I have three questions I would be grateful if you would answer: 1. What is the current value of the Orphan Assets held by the (Company name)? 2. What perc
entage of these assets currently belong to the policyholders? 3. Are you currently, or do you intend to be, in negotiations with the Financial Services Authority with regard to the determination of policyholder rights with respect to the part of these funds which do not belong to the policyholders? Thank you for your time taken to answer my questions. I look forward to your reply. ====== If enough of us with-profits policyholders write, it will send a message to the insurance companies that we know about these assets and we are concerned about them. In that way, we may just avoid being taken to the cleaners when these funds, which have come from our money, are distributed. Get letter writing and maybe you’ll get to keep some money which is rightfully yours. And maybe the insurance companies will make things just a bit clearer with regard to how they ‘reward’ their long-term, faithful, customers.
This year it is very likely that insurance companies will be able to use the results of genetic tests to pinpoint people who may be likely to suffer from an heriditary condition or illness. The tests will cover such things as Huntingdon's disease and Alzheimers disease are among the tests that will be carried out. The use of genetic information may mean that there a large groups of people who will find it difficult to get life insurance or mortgages, and even if they do, I imagine that the premiums will be near enough unaffordable. Will this mean that people will not take out such insurances? If this is the case, then the implications will run on and on. People who may have had a relation from a generation or two previous with Alzheimers or something similar will find themselves struggling to get a mortgage, and I think this should not be allowed to happen. A large section of society are being made to suffer because of something that might never happen, and this gives the insurance companies even more ammunition to increase the premiums which are rising daily as it is. This will make the vunerable even more vunerable, and it must not be allowed to happen.