Protection In Depth

Term Assurance

The following provides an outline of the different types of term assurance policies, the bases on which they can be taken out and the main options that can be included in the plan.

Level Term Assurance

A level term assurance plan is designed to provide you with life cover for a specified period of time and should you die within the term the plan will pay a tax-free lump sum. There is no investment element so if the plan comes to an end (for example, if premiums cease) the policy will have no value. The level of life cover will remain the same throughout the term of the policy.

Decreasing Term Assurance

A decreasing term assurance plan is designed to provide you with life cover for a specified period of time and should you die within the term the plan will pay a tax-free lump sum. There is no investment element so if the plan comes to an end (for example, if premiums cease) the policy will have no value. The level of life cover will decrease at a set rate over the term of the policy.

Family Income Benefit Plan

A Family Income Benefit plan is designed to provide you with life cover for a specified period of time and should you die within the term of the plan, it will pay a tax-free regular income rather than a lump sum. It is a form of Decreasing Term Assurance as the sum assured reduces annually by equal amounts over the term of the plan. Upon the death of the life assured within the term of the plan, the sum assured is typically paid out as a series of annual payments until the end of the term, at which point the payments cease. On survival to the end of the term, the plan ceases and no payment is made. Due to the potentially restricted payment period, the premiums for a Family Income Benefit plan are usually cheaper than a Level Term Assurance plan.

Convertible Term Assurance

A convertible term assurance plan is designed to provide you with life cover for a specified period of time and should you die within the term the plan will pay a tax-free lump sum. There is no investment element so if the plan comes to an end, (for example, if premiums cease) the policy will have no value. In addition, at any time during the term you will have the option to convert the plan to another type of policy. This will usually be a whole of life contract but could also be an endowment. The plan can be converted with no additional medical underwriting.

Policies can be taken out on a number of different bases, including:

• Single life - The plan is taken out in one person's name. For policies providing life cover only, the sum assured will only be paid out in the event that the sole life assured dies. Critical illness cover could also be included.
• Joint life first death - The plan is taken out in joint names. For policies providing life cover only the sum assured will be paid out when the first person dies. If the policy provides life or critical illness benefit the policy will pay out when the first person suffers the earlier of a specified critical illness or dies.
• Joint life second death - The plan is taken out in joint names. For policies providing life cover only the sum assured will be paid out when the second person dies. If the policy provides life or critical illness benefit the policy will pay out when the second person suffers the earlier of a specified critical illness or dies.
• Joint life double cover - The plan is taken out in joint names, but within the joint plan there will be a separate policy for each life assured. This means the plan will pay out separately on the death (and/or critical illness as appropriate) of each life assured. This option offers flexibility because a different sum assured can be chosen for each person.
• Life of another - The plan is taken out by one person (a) on the life of another person (b). For policies providing life cover only the sum assured will be paid to (a) on the death of (b). For this policy to be taken out there must be insurable interest between the two parties.

Premiums can be on either a guaranteed or reviewable basis. If they are on a guaranteed basis the premiums will remain the same throughout the term. If they are on a reviewable basis the premiums will be reviewed periodically (usually every 5 years) at which point the premiums could increase. The premiums at outset tend to be lower under the reviewable option but these could rise to above the guaranteed premium rate following a review.

Term policies can offer the following options:

• Critical illness - The plan will pay out the sum assured on the diagnosis of certain types of critical illness e.g. heart attack, stroke and cancer. Providers' will have a definition for each illness and most follow the Association of British Insurers (ABI) definitions. It is important that the key features document is checked to ensure that you understand the definitions that will be used by your proposed provider. Critical illness cover can be on a stand alone basis or combined with life cover. If combined with life cover the critical illness payment can be either instead of, or in addition, to a payment on death.
• Renewable option - On the expiry date of the plan this option allows a further term assurance to be taken out at ordinary rates without evidence of health as long as the expiry date is not beyond a set age (usually 65). Each subsequent policy will have the same option as long as the expiry date is not beyond the limit set by the provider. When the policy comes up for renewal the premium is likely to increase as it will be based on the age at the time of renewal.
• Option to vary the term or sum assured - This option should allow you to either increase or decrease the term and/or sum assured. Further underwriting may be required and there is likely to be a change in the premium.
• Waiver of premium - This option is used to continue paying the premiums on the policy should you become ill or disabled and be unable to work after a set period of time (the deferred period). The available deferred periods are usually 4, 13, 26 or 52 weeks. Different providers can use different definitions of disability and you should check with the proposed provider the definition to be used. The insurance company will pay the premiums on the plan for you until you are able to return to work. Some providers only allow the waiver of premium option to be included when the plan is first taken out whereas other providers will allow this option to be added at any time after the plan has started.
• Guaranteed insurability - This option allows the level of cover to be increased without further medical underwriting on the occurrence of certain events such as childbirth, marriage, promotion/salary increase and divorce.
• Joint life separation - This option allows a joint plan to be split into two single life plans on separation or divorce without further medical underwriting. The maximum sum assured under each individual plan will be the same as the sum assured on the joint policy. Each individual policy will have the same provisions as those that applied to the joint plan.

Whole of Life

Whole of life policies are designed to provide cover for life (so long as the premiums are maintained) and will provide a tax-free lump sum on death. Essentially there are 2 types of Whole of Life plans; those with a guaranteed premium (sometimes known as non-profit) or those where the premium is (amongst other things) linked to investment growth

It is also possible to provide cover for certain critical illnesses. Whole of life policies can include an investment element although as the main purpose is to provide insurance they are unlikely to accumulate a high value should you surrender the policy. Unless the policy is written on a guaranteed premium basis, the premiums are subject to review, with the first review usually taking place on the 10 year anniversary and all subsequent reviews at 5 yearly intervals thereafter. Following a review, it is possible for premiums to increase or, alternatively, cover to reduce if premiums are required to stay at the same level. If the policy is classed as a 'qualifying policy' the proceeds on death or critical illness are usually paid free of tax.

It is important to note, however, that a £3,600 a year limit now applies to the amount of premiums that can be paid after 5 April 2013 into any new qualifying policies taken out from 21 March 2012. This means that 'qualifying policy' treatment will be restricted to the gains applicable to the first £3,600 pa premiums paid after 5 April 2013. If premiums of more than £3,600 pa are paid the balance of the gain will be taxable in the same way as a non-qualifying policy

Guaranteed or Unit Linked?

Guaranteed

Whole of Life plans with a guaranteed premium will, so long as the level of cover remains the same, maintain the same premium for the life of the plan. In a similar way to term assurance, the provider will use mortality tables to help them calculate the cost to insure your life for the whole of the anticipated term. After building in some discount for expected investment returns, they then divide the total cost by the number of months they expect the plan to run (or to a pre-set age where no further premiums are needed to maintain the cover). Because, once set, the guaranteed premiums cannot be changed the premiums initially will be more expensive than an equivalent investment linked plan as there is more risk being taken by the provider and no investment risk is being taken by you the policy holder. It must be remembered though that usually these plans do not have a cash-in value on early surrender. As explained later, for investment linked plans the premium can be increased at a review date which could mean that the plan might become unaffordable in the future if the premiums rise too much.

Unit-Linked

Unit-linked - Whole of life policies include an investment element and can be established on three types of cover:

• Minimum - the deduction from the premium to pay for the cover is low and more of the premium will go towards building an investment fund.
• Maximum - most of the premium will be used to pay for the cover and only a little of the premium will go towards building an investment fund. Under this option it is likely that when the premium is reviewed it will increase to maintain the same level of cover. The first review is usually after 10 years with subsequent reviews every 5 years. Alternatively, the premium could remain the same, but the level of cover would be reduced.
• Standard - the premium is split more evenly between providing the required level of cover and building an investment fund. The premium will still be reviewed but it is less likely that it will have to increase to maintain the level of cover provided the underlying investment fund performs satisfactorily.

Premiums are used to buy units in an investment fund offered by the provider. There is usually a range of funds to choose from.

With Profits

With profits whole of life policies offer a minimum amount of cover to which are added annual bonuses (called reversionary bonuses). Once added these bonuses permanently increase the sum assured and on a claim a further bonus can be added (called a terminal bonus) which will further increase the sum assured. Like unit linked whole of life policies these plans also have an investment value although this tends to be low in the early years.

Qualifying and Non-Qualifying Policies

Whole of life policies can be either qualifying or non-qualifying plans. To be a qualifying policy the plan must conform to restrictions set by HM Revenue and Customs relating to the length of the term, the amount of premiums, the amount by which the premium may vary and the proportion of life cover to the value of premiums paid in.

Qualifying policy - provided premiums are paid when due (and, for any new policies taken out from 21 March 2012 the annual premiums after 5 April 2013 do not exceed £3,600), there will not normally be any personal income tax or capital gains tax liability on the proceeds of the plan either on death, critical illness or if the plan is encashed at any time after 10 years. On death the plan proceeds will form part of the insured's estate for Inheritance Tax unless the plan is written in trust.

Non-Qualifying policy - the proceeds on death or encashment will be free from personal income tax or capital gains tax provided the policyholder is a basic rate taxpayer. Higher-rate taxpayers may have to pay tax on any gain at the rate equal to the difference between the higher and basic tax rates. A gain will arise if the proceeds are more than the value of the contributions paid. This will apply if the policyholder is already a higher-rate taxpayer, or if the gain (when averaged (top-sliced) over the number of years the plan has been in force) when added to other income takes the policyholder into the higher rate tax bracket. Any gain may also affect entitlement to allowances e.g. age allowance for those aged 65 or over before 6 April 2013. The proceeds paid to the life assured on critical illness will be free of both personal income tax and capital gains tax.

Policy Basis

Policies can be taken on the following bases:

• Single life - The plan is taken out in one person's name. For policies providing life cover only the sum assured will be paid out in the event that person dies. Critical illness cover could also be included.
• Joint life first death - The plan is taken out in joint names. For policies providing life cover only the sum assured will be paid out when the first person dies. If the policy provides life or critical illness benefit the policy will pay out when the first person suffers the earlier of a specified critical illness or dies.
• Joint life second death - The plan is taken out in joint names. For policies providing life cover only the sum assured will be paid out when the second person dies. If the policy provides life or critical illness benefit the policy will pay out when the second person suffers the earlier of a specified critical illness or dies.
• Joint life double cover - The plan is taken out in joint names, but within the joint plan there will be a separate policy for each life assured. This means the plan will pay out separately on the death (and/or critical illness as appropriate) of each life assured. This option offers flexibility because a different sum assured can be chosen for each person.
• Life of another - The plan is taken out by one person (a) on the life of another person (b). For policies providing life cover only the sum assured will be paid to (a) on the death of (b). For this policy to be taken out there must be insurable interest between the two parties.

Premiums

Premiums for investment linked plans will be reviewed at regular intervals, with the first review being on the 10 year anniversary

Policy Options

Whole of Life policies can have a number of options including:

• Critical illness - The plan will pay out the sum assured on the diagnosis of certain types of critical illness e.g. heart attack, stroke and cancer. Providers' will have a definition for each illness and most follow the Association of British Insurers (ABI) definitions. It is important that the key features document is checked to ensure that you understand the definitions that will be used by your proposed provider. Critical illness cover can be on a stand alone basis, or can be combined with life cover. Where it is combined with life cover the critical illness payment can be either instead of, or in addition, to a payment on death.
• Waiver of premium - This option is used to continue paying the premiums on the policy should you become ill or disabled and be unable to work after a set period of time (the deferred period). The available deferred periods are usually 4, 13, 26 or 52 weeks. Different providers can use different definitions of disability and you should check with the proposed provider the definition to be used. The insurance company will pay the premiums on the plan for you until you are able to return to work. Some providers only allow the waiver of premium option to be included when the plan is first taken out whereas other providers will allow this option to be added at any time after the plan has started.
• Option to vary the premium or sum assured - This option should allow you to either increase or decrease the premium and/or sum assured. Further underwriting may be required.
• Guaranteed insurability - This option allows the level of cover to be increased without further medical underwriting on the occurrence of certain events such as childbirth, marriage, promotion/salary increase and divorce.

Trusts

Life policies can be placed in trust so that the proceeds from the policy will not fall into your estate. This can be beneficial for Inheritance Tax planning. The following is a brief description of the main types of trust that could be used:

• Bare trust - A bare trust (or 'simple' trust) is a trust under which the beneficiary has an absolute right to the trust property (and income). Provided the beneficiary has reached the age of majority he/she can take personal possession of the trust property. Bare trusts are commonly used to pass assets to children. A Bare Trust is the least flexible trust as the trustees have no discretion over who can benefit and the role of the trustee is simply to look after the trust assets until the beneficiary takes possession.
• Interest in possession (IIP) trust - Although strictly speaking a bare trust is also a type of IIP trust the term is more commonly used to describe trusts where one beneficiary has a right to trust income during their lifetime (known as a life interest) but someone else is entitled to the residual trust fund on their death. The person entitled to the trust fund after the death of the IIP holder is known as the remainderman and is said to have an 'interest in residue'.
• Discretionary Trust - Under a discretionary trust no beneficiaries have an automatic right to either trust income or capital and the trustees have a power to decide how much of either (if any) to pass on to each of the beneficiaries. This type of trust offers the most flexibility and can enable you to retain some control during your lifetime as to who benefits and when.
• Split capital trust Under a split trust any critical illness or terminal illness benefit would be payable to the policyholder whilst any death benefit would be payable to the trustees to hold on trust for the beneficiaries.