Life Assurance Policies

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Definition: Life assurance can provide you with one of two main benefits: it can either provide your successors with money when you die or it can be used as a money saving plan to provide you with a lump sum (or income) on a fixed date. In recent years, however, both types of scheme have become more flexible and many policies allow you to incorporate features of the other. This can have great advantages but the result is that some of the definitions appear somewhat contradictory. There are three basic types of life assurance: whole life policies, term policies and endowment policies.

Whole life policies are designed to pay out on your death. In its most straightforward form, the scheme works as follows: you pay a premium every year and, when you die, your beneficiaries receive the money. As with an ordinary household policy, the insurance only holds good if you continue the payments. If one year you did not pay and were to die, the policy could be void and your successors would receive nothing.

Term policies involve a definite commitment. As opposed to paying premiums every year, you elect to make a regular payment for an agreed period: for example, until such time as your children have completed their education, say eight years. If you die during this period, your family will be paid the agreed sum in full. If you die after the end of the term (when you have stopped making payments), your family will normally receive nothing.

Endowment policies are essentially savings plans. You sign a contract to pay regular premiums over a number of years and in exchange receive a lump sum on a specific date. Most endowment policies are written for periods varying from 10 to 25 years. Once you have committed yourself, you have to go on paying every year (as with term assurance). There are heavy penalties if, after having paid for a number of years, you decide that you no longer wish to continue.

An important feature of endowment policies is that they are linked in with death cover. If you die before the policy matures, the remaining payments are excused and your successors will be paid a lump sum on your death. The amount of money you stand to receive, however, can vary hugely, depending on the charges and how generous a bonus the insurance company feels it can afford on the policy's maturity. Over the past few years, pay-outs have been considerably lower than their earlier projections might have suggested.

Options. Both whole life policies and endowment policies offer two basic options: with profits or without profits. Very briefly the difference is as follows.

Without profits. This is sometimes known as 'guaranteed sum assured'. What it means is that the insurance company guarantees you a specific fixed sum (provided of course you meet the various terms and conditions). You know the amount in advance and this is the sum you - or your successor - will be paid.

With profits. You are paid a guaranteed fixed sum plus an addition, based on the profits that the insurance company has made by investing your annual or monthly payments. The basic premiums are higher and, by definition, the profits element is not known in advance. If the insurance company has invested your money wisely, a 'with profits' policy provides a useful hedge against inflation. If its investment policy is mediocre, you could have paid higher premiums for very little extra return. The lack of money saving in this scenario could be depressing.

Unit linked. This is a refinement of the 'with profits' policy, in that the investment element of the policy is linked in with a unit trust.

Other basics. Premiums can normally be paid monthly or annually, as you prefer. Size of premium varies enormously, depending on the type of policy you choose and the amount of cover you want. Also, of course, some insurance companies are more competitive than others. As very general guidance, £50-£70 a month would probably be a normal starting figure. Again as a generalisation, higher premiums tend to give better value as relatively less of your contribution is swallowed up in administrative costs.

As a condition of insuring you, some policies require that you have a medical check. This is more likely to apply if very large sums are involved. More usually, all that is required is that you fill in and sign a declaration of health. It is very important that this should be completed honestly: if you make a claim on your policy and it is subsequently discovered that you gave misleading information, your policy could be declared void and the insurance company could refuse to pay.

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