|
Term Life Insurance
Term
insurance is, as the name suggests, a policy which only
pays out if you die within a specified term. This could
be 10, 20, or 30 years from the date the policy
commences.
This is the simplest type of life cover,
and it usually requires that you pay a premium on some
sort of regular basis in order to be covered. The amount
of that premium depends on both the amount of money you
have agreed as the death benefit and the statistical
likelihood you will die. You are effectively gambling
with the Life Company on whether or not you will die
during a certain period. If you die you "win"
and someone gets the payout. If you don't die you
"lose" and you get nothing at the end of the
insured period because you are still alive. This is one
bet we all want to lose.
Term insurance is generally cheap and is
expected to fall over time barring a major impact
disease.
Just because nothing involving insurance
can ever be simple, there are several main types of term
life insurance. The first, level term, is the most
commonly advertised. This is a form of term insurance
that locks in the premium costs for as long as you hold
the policy ie: you pay the same amount throughout. It
means you pay over the odds each month when you are
younger, but that is balanced by savings on the
"real" cost of premiums as you get older. You
also get the benefit of paying at today's prices. As the
real value of your premiums erodes in future, you make
substantial savings.
Other types of term insurance include:
Escalating
term insurance: these schemes
demand you pay more each year, so the amount you
would get at death goes up. They tend to be cheap
when you are fit and young but more expensive as
you get older.
Increasing
term insurance:you increase the
amount of death payment at set times or whenever
you choose (such as when you have a child).
Obviously you then have to pay more each month. A
better alternative is renewable term insurance --
you can get this option built in to some ordinary
level term insurance plans. It allows you to take
out a new term insurance plan when your original
deal ends, regardless of your state of health at
that time.
Decreasing
term insurance: the monthly
payments stay the same, but the amount of cover
you get for that goes down every year. This sort
of insurance is sometimes sold alongside a
repayment mortgage, and the death benefit drops
in line with the amount you have left to pay off
on your loan. It's also useful for parents -- as
your children grow up and leave home, you will
only need to insure for a smaller amount of death
benefit.
Convertible
term insurancea way for the
insurer to get you to take out an
investment-cum-insurance policy in future. The
selling point is that the price of your future
investment policy is based on your health when
you bought the cheaper term insurance.
Whole of Life Policies
When you buy a whole of life scheme, it
covers you right up until death -- whenever that may be.
Provided, of course, that you keep paying in the
premiums.
This type of policy is expensive and
complicated. The money in your account earns some
interest each year. Depending on how fast that grows,
your annual premiums can actually go down over time, and
there may come a stage when the interest on your savings
will cover all your premiums so there's nothing more to
pay.
The cash-in-value of the policy may or may
not be equal to the amount of money you have paid into it
over the years.
You need to make your own decision about
what sort of life cover you think you need. The simplest
kind is a level term insurance policy with a renewable
option so you've got cover for as long as you need it.
Ultimately you just want a lump sum to be payable to your
dependants should you drop dead at an inconvenient time!
You can invest the rest of your cash in the usual places
such as an index tracking fund until you've accumulated
enough not to bother with life insurance anymore.
Which is best, term or whole of life?
If the need for life cover is for a fixed
term such as while your children are growing up, then
choose term insurance.
If the need may turn out to be longer,
look at a longer term or go for a renewable or
convertible term plan.
If the need is for the whole of your life,
then choose whole of life.
Unit Linked Policies
A Unit Linked Policy is a a life insurance
policy that is linked to an investment in funds for the
purpose of building up savings coupled with the life
protection
The investments can be in shares, State
fixed-interest bonds and property. A certain number of
units are purchased in the fund with your investment A
Fund Manager manages the fund which can go up or down in
value, depending on the changes in the value of the
underlying assets. The principal difference between a
Unit Linked Fund and a Unit Trust is that the Unit Linked
Fund has the insurance policy attached to it.
Depending on the degree of acceptable
risk, an investment mix ranging from a spectrum of a zero
risk fixed interest fund to for example a high risk
Japanese equities fund, with much to choose from
in-between, can be recommended to the investor.
The 3 categories of Unit Linked Funds are:
Secure
Funds(low
risk) where investments have 100 per cent
security( short of a collapse of the financial
system).
Balanced
Funds(medium risk) these investments are made in a
wide range of domestic and overseas assets, with
the objective of achieving enhanced capital
growth.
Specialist
Funds
(higher risk) These investments are made
in in a specific asset, e.g. shares or property;
or a specific region e.g. Ireland, UK, US,
Ireland to achieve high long-term growth.
With Profits Bonds/Policies
The decline in equity returns is prompting
life insurers to consider withdrawing from the 'with
profits' product market.
Investors in with-profits policies, such
as lump sum with-profits bonds or regular payment
endowments, receive two types of bonus. Once paid, an
annual bonus cannot be taken away provided the policy is
held to maturity. However, insurers are under no
obligation to pay any terminal bonus, whatever the
estimates that are given in annual policy statements. All
life companies have cut these bonuses and the reductions
are having a significant impact on maturity values. The
penalties for surrendering policies early, have also been
increased.
The life insurers 'smooth" bonuses in
the good years so that payments can be made in bad return
periods. However, the sharp decline in equity values has
prompted the steep fall in bonus values. The stronger the
financial position of the life company, the greater its
ability to weather market downturns.
The popular benchmark of stability, the
'free asset ratio', which expresses as a percentage, the
ratio of excess assets in with-profits funds to cover
liabilities, is not considered to be reliable as there is
no standard for determining a company's future
liabilities. The Association of British Insurers has
recommended that life companies provide independent
credit ratings, similar to Standard & Poor's or
Moody's, the rating agencies, with all annual statements
sent to with-profits policyholders. However, things are
seldom simple. Some actuaries warn that credit ratings
could give investors a false sense of security as
Equitable Life had a good rating up to the late 1990's.
With-profits funds are mainly invested in
the stock market. So a poor market cannot be escaped
from. The smoothing range is generally between 95 to 105
per cent. So the payout can actually be 5 per cent
greater or less than what your investment has actually
earned.
|
