Introduction
Term assurance is the most basic form of life assurance. As the name suggests, the policy runs for a fixed term.
There is no investment element to a term assurance policy – it is pure insurance – unless you make a death claim then the policy ends at the end of the term and you get nothing back.
Types of Term Assurance
Essentially there are three types of term assurance.
Term only – this provides cover for a fixed term, and if no claim is made, cover ends at the end of the term.
Convertible Term – this is a term assurance policy with a fixed term, but also included is the option to convert to “whole of life” assurance at any time during the plan. The conversion normally occurs without any further medical underwriting; assuming the same level of cover is applied for.
Renewable Term – again a fixed term contract, but with the option to renew a for a further identical term at maturity
How can they be set up?
It is possible to have single life and joint lives assured. So, for example, a husband and wife could take out two single life plans or a joint life, first death plan. With a joint life plan, on first death the proceeds from the policy are normally paid to the surviving life assured.
It is possible to take out two single life term plans, and write them under a suitable trust, for the benefit of spouse and/or children. The benefit writing a single life plan in Trust is that the proceeds from the policy do not enter your estate, where they could be delayed in being paid out, for example to redeem a loan or to provide for your children, due to the need to obtain probate which can take up to and sometimes in excess of 6 months.
We will cover more on Trusts and their uses in a later article.
When do they pay out?
As well as paying out on death of the life assured, modern plans may include “terminal illness” benefits – what this means is if you are diagnosed with an illness which, in the opinion of medical professionals, reduces your life expectancy below 12 months then the plan will pay out the sum assured ahead of your death.
The benefit of this is that you then have time to ensure the proceeds from the policy are used for the purpose which you intended and allow you to get your affairs in order ahead of your passing.
Cover Types
It is possible to set up plans in a number of ways: –
Level cover – the sum assured (amount of cover) remains constant throughout the term of the plan
Indexed cover – the level of cover increased each year, in line with a fixed percentage, to maintain the real purchasing power of the sum assured
Decreasing cover – often taken out at the same time as a repayment mortgage – the level of life cover decreases over time in line with the mortgage profile.
In the next part of this article we will consider the various options which can be included within a term assurance policy as well as the different uses and some special types of term assurance which are useful financial planning tools.