Life Insurance
Life Insurance
Life Insurance
Life insurance is not a recent invention; it can be traced back to Roman times when a club called the Hornblowers was founded in Algeria in 203AD by a Roman garrison. In return for a regular payment into a central fund, a lump sum was paid in the event of death, promotion, transfer or becoming a veteran.
The earliest recorded life insurance in England was taken out in June 1583 on William Gibbons. It was payable if he died within 12 months, which he did, and the princely sum of £382.6s 8d was duly paid.
Whereas life assurance was originally available only to those who could afford to pay comparatively large premiums, the changing structure of society during the 18th and 19th centuries created an awareness that the ‘industrial classes’ needed some form of financial protection.
Before the end of the 18th century large numbers of Friendly Societies were providing some provision for sickness and funeral expenses. Out of the Friendly Societies grew the concept of ‘industrial’ life insurance, with companies providing assurance that was especially suited to the needs of the majority of the population.
As society has developed in sophistication, there has been an increased awareness that life insurance should provide more than an amount to pay for funeral expenses; it should provide a replacement for lost earnings.
Insurable Interest
Since 1774 every applicant for a plan must have an ‘insurable interest’ in the life assured.
Each individual has unlimited insurable interest in their own life and the life of their spouse. However, if someone wants to insure the life of anyone else they have to be able to show that they will suffer financially upon that person’s death. With their agreement they may then insure that person’s life up to that amount.
There is no automatic insurable interest between parent and child. Lenders would have insurable interest in the life of a borrower, but only to the amount of the debt.
Insurable interest must be shown only at the outset of a plan and it is the underwriter who needs to establish its existence.
Different Options
Term Plans
A ‘term’ plan is designed to pay the benefit if the insured event occurs within a certain period of time (the term of the plan). Historically, the benefit has been the ‘guaranteed sum assured’ and has been paid by the insurer in the event of the death of the life assured.
Some may offer renewability (where the original term selected may be extended) or convertibility (where the plan may be converted to a more permanent form of life assurance).
As term assurance is temporary cover, these plans are attractive to clients who need high levels of protection for a limited period and at the lowest cost. Types of term cover available in the market place are:
Level
A level term plan is one where the sum assured remains the same throughout the term. The sum assured will only be paid should death occur during the term. At the end of the term the plan will cease. This plan is suitable where someone needs a fixed amount of money to pay a debt within the term.
Decreasing
A decreasing term plan is one where the sum assured reduces each year until, at the end of the plan, it decreases to zero. It is generally used in conjunction with a repayment mortgage (or similar loan) where the amount of debt is reducing, so, the amount of life cover needed to protect it is also reducing. It is often set up to reduce in line with such a debt. Although the sum assured reduces, an individual’s contribution remains the same.
Family income benefit
On death, rather than the sum assured becoming payable as a one off lump sum, it is paid out in instalments. These instalments can be paid monthly, quarterly or annually. The instalments would be paid until the end of the original term of the plan. For example, if the plan was set up to run for 10 years and the life assured died after 4 years, the instalments would be paid for a further 6 years.
The income is free of income tax because it is regarded as instalments of a sum assured. This plan is suitable where individuals want their dependants to receive a regular income on their death, rather than a lump sum (maybe because they aren’t used to handling capital sums).
Renewable
A renewable term plan allows an individual to extend their plan for a further term, once they reach the end of the original term. This is allowed without further underwriting, so is particularly useful to those individuals whose health deteriorates. Again, the sum assured will be limited to what it was on the original term and an individual’s contribution will reflect their age and sex at renewal.
This is also useful in business situations, where the business wishes to protect a loan. Frequently, at the end of the term of the loan, it is re-financed and further life cover is needed. The option allows this to happen even if an individual’s health is no longer good.
Increasing
These are term assurance plans where the sum assured increases automatically during the term of the plan, for example, on every plan anniversary.
There are various options as to how much the sum assured can increase by, for example, in line with the Retail Prices Index or the Average Earnings Index, or by a fixed amount, for example 5%.
An individual’s contribution will increase each year based on their age, sex and the amount the sum assured has increased by.
The benefit of an increasing term assurance plan is that they help protect the sum assured against the effects of inflation and maintain its real buying power.