Insurance Example 5

Mr and Mrs Argent are in their early 40s and have two children aged 12 and 15. Apart from mortgage protection they have no life insurance. To provide for his wife and family while the children are still dependent, Mr Argent takes out a 10-year FIB for £12,500 p.a. at an annual cost of £133. To provide financial security for his wife, he also takes out a level term assurance for £120,000 over 20 years at a cost of £11114. The total annual cost after tax relief is £11121.27.

There are several other variations on the term assurance theme. Normally a policy is granted on the assumption of ordinary health. Policy proposal forms contain a number of questions about health, but, provided there is no obvious indication of serious illness or family predisposition to it, companies today tend to issue term assurance for relatively modest amounts (which today can mean £120,000 -£150,000) without making medical enquiries of the individual's doctor. They are even less likely to require a medical examination if the "proposer" (the person wishing to take out the policy) is aged under 50, as this is a costly and troublesome business for the company. However, the fact that the young man in particular is thus in a good position to take out a policy without difficulty does not protect him from more awkward questions in the future. A 40-year-old man whose health has not been of the best may well be required to undergo a medical examination if he wants to take out a policy, even if the same company happily allowed him to do so without one 15 years previously. So the privilege of renewing the assurance you already have "without medical evidence" (i.e. without the company having the right to require you to provide medical evidence or to refuse you cover because your health has deteriorated) is a valuable one. It is sometimes incorporated in term assurance policies, especially those for the shorter terms of 5 and 10 years, in which case they are renewable contracts. The renewability option here is of almost negligible cost at a few pence per month.

Term assurances today may also contain an option, or more accurately a series of options, to increase the sum assured. Thus an FIB policy for £111,000 p.a. over 25 years may allow the policyholder to increase the benefit assured up to a maximum of £14,000 p.a. in four stages over 20 years, with the maximum increase at any one option date limited to the amount of the original £111,000. Someone taking out such a policy could increase the sum assured to £12,000 after five years and again to £13,000 after another five and, if he wished, to £14,000 after a further five years. An option of this type could add 10-16% to the cost of the premiums.

An alternative to increasing the benefit by jumps at option dates is escalating term (or FIB) where the sum assured (or benefit p.a.) rises each year by a specified percentage, while the annual premium remains the same. The drawback is that even a modest rate of escalation, say 3% or 6%, pushes up the premium per initial sum assured sharply compared with level benefit plans, and the longer the term chosen the greater this effect will be. Over 10 years an escalation rate of 6% will raise the level sum assured from £111,000 to £111,630; over 20 years it would rise to £12,650, and, since the mortality risk is always rising throughout the term, it is not surprising that an escalation rate of 6% p.a. requires a 16% increase in the level premium on a 10-year term. As for FIB, a 6% escalation rate raises the annual premium by up to 36%. An alternative is for the premium itself to rise each year along with the sum assured; one company, for example, uses the Retail Price Index to adjust both benefit and premium.

On the whole, it would appear more practical to use an option-inclusive plan and review your commitments at regular intervals rather than to undertake an open-ended commitment to a policy which may not correspond with your needs in future years.

Another option that has become increasingly popular in recent years is convertibility. Convertible term assurance is level term assurance which may be converted to an endowment or whole-life contract, usually at specified dates or within a certain number of years of taking out the policy. This type of policy is particularly aimed at the younger person who cannot now afford the much larger premiums on investment-oriented policies and whose immediate need is for protective cover. Since the extra cost of the option is about 15-20%, it does not restrict the amount of cover the younger family man can afford, while providing him with the guarantee of long-term insurability. Of course, for the majority of young men aged up to 30 such an option may not be especially valuable at that time. But as the years progress and the chances of illness increase, the guarantee incorporated in the convertibility - that of being able to take out a long-term investment-oriented policy at the normal rates for the age at conversion without medical evidence - becomes more and more valuable.

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Insurance Example 4

Mr Black wishes to provide for his wife and children. He wants to ensure that they have an income of £150 a week to make up for the absence of his earnings. To provide this benefit (£12,500 p.a.) over 25 years will cost the 37-year-old Mr Black about £180 p.a. before tax relief. To ensure his wife's security if he should die near the end of this period, Mr Black also takes out a level term assurance with a sum assured of £120,000 with a 25-year term at a cost of about £190. The total annual cost after tax relief is £11140.25.

The exact combination of... see: Insurance Example 4

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