Life Assurance: Protecting your family’s future

life assurance

Life assurance has a part to play at all stages of life, be it to provide for your loved ones whilst they are financially dependent or to provide lump sums on death to cover any Inheritance Tax Liability.

Whilst there are many contracts that provide life assurance as a by-product there are three main types of cover that meet the requirements for the majority of clients:-

Term assurance

At its simplest, in exchange for paying a premium, the life office will agree to pay out a certain sum if the insured dies before a certain date. The sum assured can be level throughout the term, or alternatively index-linked for inflation protection, similarly the cover could be set to decrease at a predetermined rate to mimic the reducing balance of a repayment mortgage.

If the policyholder does not die within the term, the policy merely lapses. There is no payout of any sort. These policies are usually cheap to buy and they perform the useful function of providing protection for those who benefit from the policy, such as family members, if the policyholder dies.

The same principle of protection applies to a number of other types of insurance whether the benefit is, for example, to provide specific help to the deceased's family, or to repay a mortgage.

Family Income Benefit

Strictly speaking this is a variant of Term Assurance, but the most noticeable difference is that the benefit is expressed as an ‘annual income’ rather than a one off payment. As with term assurance the life office will agree to pay out the benefit if the insured dies before a certain date. Family Income Benefit could be used to provide a replacement income for your surviving dependants until the age you’d expect them to be financially independent.

Whole-of-life policies

Whole of life policies are the converse to term assurances, whole-of-life policies provide cover for the whole of the insured's life, rather than simply for a pre-defined term. They are generally more expensive than term assurance because there is certainty that the policyholder will die at some time. Typically, this type of cover is used for Inheritance Tax Planning.

Tax deductible Life Cover

Better known as a Relevant Life Policy: this is a single life plan, taken out on the life of an employee by an employer to provide death in service benefits. They are designed for individual members who may require life cover over and above that of a main company scheme already available to them or, where the number of employees is too low for a company group scheme.

The company can make the payments, usually as an allowable deduction without them being treated as a benefit in kind, which means:

  • Payments are treated as a business expense and are likely to be an allowable deduction against Corporation Tax for the employer.
  • No liability for the employer or employee to National Insurance.
  • No liability for the employee to Income Tax.
  • Benefits paid tax free to the nominated beneficiaries.
  • These payments do not form part of an individual’s annual or lifetime allowance.

Summary

In summary, life related insurances are all about what the type of benefits you require, and for whom. If it is basic protection for loved ones when you die, then the costs can be quite modest and the policies quite straightforward. For full-blown investment products inclusive of life cover, the terms may be more complicated, but the long-term returns can be worthwhile. No one said that life assurance was necessarily easy to understand but it is an important ingredient in many people's personal financial portfolio.


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