Term assurance - life insurance - by independent financial adviser John Bramwell

Term Assurance

What is Term Assurance?

Term assurance pays a lump sum (or, in the case of family income benefit, a series of lump sums) on the death of the life assured. It has no element of savings or investment and it does not pay out on the life assured's illness. The lump sum paid out is free of income tax and capital gains tax, and, if the policy is placed in trust, it should not increase Inheritance Tax liability.

It usually offers the cheapest way to purchase pure life assurance where the need for cover is likely to last for only a certain length of time.

The main types of term assurance are:

Level term assurance - pays a set lump sum on death.

Decreasing term assurance - is the same as level term assurance except that the lump sum that is paid decreases over the term of the policy. This kind of policy is suitable for covering debts that are decreasing with time, eg. a repayment mortgage. The premiums are lower than for level term assurance, as the amount that the insurance company pays out on a claim is likely to be less.

Family income benefit - is similar to decreasing term assurance except that, rather than paying out a lump sum on death, an income (a series of regular annual payments) is paid until the end of the term of the policy is reached.

Options?

A number of insurance companies offer contracts that include two, or even all, of the following three options. The premium will normally be higher than that for a basic term contract, but the client gains added flexibility.

Increasable term assurance - provides for the sum assured to be increased over the term of the contract, without any evidence that the life assured is still in good health. Such policies enable you to ensure that your life assurance maintains its value in real terms against inflation. Premiums increase in line with the sum assured.

Convertible term assurance - ability to convert the policy into either an endowment policy or a whole of life policy, with up to the same sum assured. This is a valuable feature if the policyholder’s need is for additional savings (convert to endowment) or a longer-term protection (convert to whole of life).

Renewable term assurance - allows the client to obtain a term assurance policy for a short period (eg. 5 years), at the end of which the client is then given the guaranteed right to buy a similar policy for a similar term of years without having to prove that he is still in good health. The short initial term means that premiums are low, whilst the guaranteed renewability means that the client will not then be left without life assurance at the end of the term. The premiums will increase with age each time a new policy is taken out under the option.