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LIFE ASSURANCE/INSURANCE & BUSINESS PROTECTION EXPLAINED

Life insurance/assurance is a financial product that could mean your loved ones receive a sum of money if you were to pass away while covered by the policy. In broad brushstrokes, there are two main types of life insurance you need to know about: term life insurance and whole of life assurance.

Life assurance vs. life insurance

Life insurance and life assurance are easily confused, and while the former is perhaps better known, what exactly is a life assurance policy? In this article we’ll explain the nuances between these terms.

What is life assurance?

Life assurance can be another way of describing a ‘whole of life’ policy. An insurer may refer to life assurance, meaning the cover is indefinite, with no fixed expiry date, unlike a life insurance policy term. The word ‘assurance’ is used because you’re assured that a valid claim will be paid regardless of when you die, so long as you pay your premiums.

What is life insurance?

Life Insurance usually means that you are covered for a certain amount of time. When you apply, you choose the ‘term’ of the policy, such as 25 years. If you die within the term chosen, your loved ones could receive a cash sum. However, if you survive the term, the policy will end and no cash sum will be paid out.

What’s the difference between life assurance and life insurance?

Here are the differences at a glance between life assurance and life insurance:

Life assurance

  • Whole-of-life cover, with a payout ‘assured’, upon death.
  • Higher premiums, due to the indefinite term length, the provider expects to pay a valid claim.
  • These policies sometimes include an investment element and are sold through advisers.

Life insurance

  • Cover applies over a chosen policy length.
  • Payout available only if you die within the length of the policy.
  • Monthly premiums are often cheaper.

How does a life assurance policy or whole of life policy work?

Life assurance policies offer insurance cover for the whole of your life, rather than a chosen policy length. A life assurance payout is tax-free, and provided the premiums have been paid, a claim can be made upon the death of the insured person. You’ll have the advantage of guaranteed cover for as long as you need it, but the reality is you’ll pay higher premiums for the privilege.

Who is life assurance for?

These policies are most commonly used in Inheritance Tax planning. If you’re interested in whole-of-life cover, it’s worth speaking to your Prosperity Financial Advisor to find out if this is the right type of protection for you.

Types of term life insurance

Decreasing term life insurance

For many people, the first time they think about life insurance is when they first take out a mortgage. In this instance, you could choose a term duration that covers the length of your mortgage repayments, as once the mortgage has been paid off you may not have a need for life insurance to protect it. Decreasing term life insurance, sometimes known as mortgage life insurance, means your cash sum decreases roughly in with the way a mortgage decreases. The upshot is that you can choose the exact amount of cover for your needs, and the premiums are lower, due to the fact the cash sum reduces over time.

Level term life insurance

For many households, a ‘level’ policy is the best type of life insurance as the cash sum stays the same throughout your policy term, and your monthly premiums will remain the same unless you make a change to your policy. With level term life insurance, the cash sum could be used to cover childcare costs, school fees or unpaid bills. If your children, partner or other relatives depend on you financially and your parental responsibilities, this type of policy could help financially protect your family if you passed away.

Increasing term life insurance

Perhaps one of the lesser known types of life insurance policy is ‘increasing term life insurance’. This means you pay higher premiums over the length of your cover but your cover amount is reviewed against measures of inflation, or a fixed rate so it rises over time. Premiums are normally reviewed annually or at set yearly intervals. This type of life insurance is normally designed to protect against inflation and the rising costs of living.

Other types of term life insurance

In addition, you may hear the term renewable term insurance, which means you can extend your term without having to undergo a new medical examination, or new underwriting. With this type of life insurance, you may have to pay higher premiums as you get older, and there will be a renewal limit. If your term life insurance can be converted into a whole-of-life arrangement, then you have a convertible life insurance policy.

Terminal illness vs. critical illness

Both terminal and critical illnesses refer to serious medical conditions. But the difference is that a critical illness refers to a specified serious injury, illness or medical episode, whereas a terminal diagnosis means your hospital consultant expects the illness will lead to death within the next 12 months.

Critical Illness Cover

Critical Illness Cover can be added to Life Insurance or Decreasing Life Insurance for an extra cost. It could pay out a cash sum if you’re diagnosed with, or undergo a medical procedure for one of the specified critical illness that most insurance companies cover during the length of your policy, and you survive for 14 days from diagnosis. The list of illnesses that are usually covered include many types of cancer, heart attack and stroke. It’s important to note that some types of cancer are not included and you need to have permanent symptoms to make a claim for some illnesses.

Terminal Illness Cover explained

Terminal Illness Cover is automatically included at no extra cost on most Life Insurance and Decreasing Life Insurance policies with a term of at least 2 years. It could pay out the full amount of cover if you are diagnosed with a terminal illness during your period of cover.

A terminal illness is one that has no known cure or has progressed to a point where it cannot be cured, and in the opinion of your hospital consultant and our Medical Officer (a qualified doctor employed by a life company), it’s expected to lead to death within 12 months.

Your cash sum would be paid on receipt of a valid claim, and you can decide how the money is spent. Like Critical Illness Cover, it’s important to note that life insurance is not a savings or investment product and has no cash value unless a valid claim is made. You should also note that no claim for terminal illness cover can be made after the insured person has passed away.

Do I need Critical Illness and Terminal Illness Cover?

Anyone can be affected by a life-threatening illness, so having the right protection in place could help to alleviate stress at a difficult time.  A valid claim for terminal illness cover could mean you receive the cash sum earlier when you require financial assistance.  Or if you choose to add Critical Illness Cover, a successful claim could help pay for childcare costs, household bills and lifestyle commitments.

Business Protection

To the majority of businesses, its most valuable asset is its people, and yet they often go unprotected. Losing someone who is crucial to the business could leave a company in a perilous position. Whether it’s losing out on revenue through an employee fundamental to sales growth, or the loss of key clients with whom the individual had built a strong relationship, it can have dramatic consequences for businesses of all sizes and across all industries. Additionally, there are often substantial costs associated with hiring and training a new member of staff. There are four main types of business protection:

  • Relevant life – Relevant life is effectively a life insurance taken out by an employer for an employee or director that takes a salary from the business
  • Shareholder protection – In the event that a shareholder passes away, shareholder protection provides the remaining shareholders with a lump sum designed to allow them to purchase the remaining shares and stay in control of the company, removing the risk of the company falling into unwanted hands
  • Key person insurance – Key person insurance replaces the financial losses that occur when a key employee loses their life or becomes seriously ill and unable to do their job, such as lost sales or contracts
  • Business loan protection – Following the death or incapacity of a key member of business, business loan protection ensures that any remaining loan repayments are covered, ensuring no financial impact is felt by the business

Small and medium enterprises make up approximately 99% of the business landscape in the UK and typically, these businesses tend to be more reliant than larger operations on a few key individuals that drive business forward. The permanent or even temporary leave of absence for one of these key people can have serious continuity implications for businesses.

Get the right life insurance for you, your family & your business

Ultimately, the best type of life insurance is the policy that matches you and your loved one’s needs, providing the right amount of cover at a price you can afford. Talk to your Prosperity Financial Advisor to find out more and get the right advice on what (if any) is the best type of protection for you.

Source: Legal & General, June 2020

This newsletter has been issued by Prosperity Financial Advisors & Stockbrokers. The information contained in this newsletter has been prepared using all reasonable care.  However, it is not guaranteed as to its accuracy, and it is published solely for information purposes.  Our opinions are subject to change without notice and we are not under any obligation to update or keep this information current. This information is not intended to be construed as advice and should not be viewed as such.