Life Cover Reviewer

For the self-employed, whose income may vary consider­ably from one year to another, flexibility is important and the single-premium method is eminently flexible. It allows the selection of unit-linked, with-profit or non-profit schemes as the individual wishes, in accordance with his estimation of investment opportunities. In 1976, for example, high interest rates might have made a unit-linked fixed-interest fund a natural choice for a single-premium investment. In other years other sectors might have more appeal, and in the years close to retirement age guaranteed non-profit schemes could be chosen.

In one respect non-profit, unit-linked and with-profit plans differ considerably from one another. This is in the sum they payout if the life insurance plan holder dies before retirement. Some repay only gross premiums contributed; others pay back contributions plus interest at a rate ranging from 3% to 8% p.a. and unit-linked plans repay the accumulated value of the units at the date of death. Nor is there any apparent relationship between the generosity in this respect and the final retirement benefits. For many people, it probably makes sense to purchase term assurance or FIB along with a regular pension policy, and in this case the exact treatment of premiums on early death is not so important.

An important option that is available under all self ­employed pension plans is to take part of the benefits as a tax-free cash sum at retirement. The amount taken can be up to three times the remaining annual pension - a complicated sum to work out but one usually provided in companies’ illustrations.

It will normally be worth the policyholder’s while to take the biggest possible tax-free sum at retirement. The reason is that any pension payable under the pension plan will be taxed as earned income, while if cash is taken and invested in a purchased annuity, then part of the return will be tax-free as a return of capital. Except for those paying very high rates of income tax and/or investment income sur­charge in retirement, commutation offers one method of boosting their income.

The surrender value is usually the value at bid price of the units accumulated (less the appropriate charge). The bid price is usually 5-7% below the offer price at which units are sold. However, some companies also make a deduction from the proceeds for capital gains tax liabilities in the fund. The reason is that the company itself is liable to capital gains tax at 30% on any investment profits realised.

It has to pay only when it actually sells the investments, and in most cases companies have unrealised profits on their holdings. The potential liability to tax does have to be shared out among policyholders, however. A deduction of 10% of the total gain achieved on the policyholder’s investment is one way of doing this. In other cases, the tax liability is “built in” to the unit price (i.e. the bid price is slightly lower than it would otherwise be) according to a more sophisticated formula.

Nobody knows what the future holds and the rate of growth in investment values is one of the greatest unpredictables. So when trying to compare policies an estimate has to be used. This should be realistic in the sense that it reflects past experience (just as reversionary bonus rates should not be projected at higher than current rates). A rate of 7.5% p.a., which is less than some companies have achieved, is commonly used in illustrations. When you are quoted benefits at maturity for a unit-linked policy, always check the estimated growth rate. If a rate of 10% or 12% p.a. is being used, the figures should be taken with a pinch of salt. It is also important to ensure, when comparing one plan with another, that both incorporate the same estimated rate of growth.

The factors that should determine the choice are as follows:

• 1. Which policy produces the highest maturity value on the same assumed growth rate after taking all fund charges into account?
• 2. Which policy embodies the most attractive investment funds with more promising investment prospects and management (based on past experience)?

The fundamental point about pure (or protective) life insurance has already been made. It is designed to protect, not to enrich, and works on the same basis as fire or motor insurance: unless a claim is made no benefit can be paid. Here are a variety of policies suitable for different needs and situations. In setting premium rates for short term policies, life insurance companies assess the likely pattern of deaths of policyholders from published fables of Mortality, the likely pattern of interest rates over the period and the likely level of expenses, and then attempt to set the premium rates at such a level that lent funds are available to meet all claims with a small safety margin to spare.

The factors determining the annual cost of a pure protection policy are the age at entry and the term, i.e. the number of years it is to run. For a 30-year-old man the premium rate on a 10-year assurance has to cover the low immortality and claims pattern of the early years and the ruing mortality closer to age 40. For the 40-year-old, the insurance has to reflect not only the higher mortality. Likewise, the longer the period for which the cover is to continue, the higher the premium will be because of the increase in mortality risk.

The whole-life insurance policy, which is a permanent protection policy since the sum assured is payable on death whenever this occurs, operates on a different basis. Here the company knows it will have to pay out the sum assured at some point, the only question being when. With assurances for shorter periods, the question is whether any benefit at all will be paid under the policy.

So whereas in the former case assets are accumulated towards an inevitable event, and the policy therefore acquires a surrender value for the policyholder, in the latter case there is little or no accumulation since all the funds contributed by policyholders are used up in paying out to the dependants of those who die during the term of their policies.

Funeral costs

These can vary depending on location, type and many other reasons. More than 2 million funerals are arranged by Americans every year- they can cost more than 10,000 dollars. The average cost of an adult funeral is around 10,000 dollars. This is often a difficult subject to talk and think about. Nevertheless, it is a critical area to include in your life insurance planning as well as in your overall financial strategy.

Emergency Fund/ Readjustment Period

You may consider at least two to six months, to cove tike off work and other expenses that may need to be covered or replaced.

College Costs

Knowing how much college costs is to some degree an uncertainty, as it will depend on many factors, including tuition, room and board, books and expenses.

There are two types of college costs for which you will need to plan:

• Direct costs- fix charges established by the college; such a tuition, room and board (non-campus student housings and meals).
• Indirect costs- expenses controlled by the student; such as personal expenses, books and transportations. The college may be able to give you some guidelines on typical indirect expenses at their campus.

Estimate your expenses for one year, or you can request lists from colleges that interest you and adjust them for anticipated transportation and personal expenses.

If college is few years away, you will need to build future cost increases into your planning. If you have a particular college in mind, you may want to use current costs at that college to forecast your future expenses. College tuition costs increased 5 percent annually on average between 1997 and 2000, according to the College Board. This is only an estimate of your educational expenses. The actual cost may vary depending on many factors.

 Confusion occurs because there is much discussion of using life insurance as a funding vehicle for college.  We are looking strictly at the death benefit rather than the cash value of a life insurance policy. Thus, life insurance can be of enormous help to you.

Although a number of medical conditions would exclude you from obtaining a life insurance, various insurance companies in different countries may accept or reject life insurance policy applications based on varying medical conditions.

Indeed different life insurance companies may have different attitudes to medical conditions and examinations. In fact some life insurance companies may not even require you to do a medical test based on the sum insured. Some policy providers may disregard minor health problems. In any case the insurance broker or company would need to have your doctor’s details to check your medical records. It is therefore important to disclose any conditions you may have before you take out the policy. Not disclosing any medical conditions may invalidate your policy resulting in a non payment of the sum assured at the time you make a claim.

Depending of what conditions you have, some insurance companies may decide to impose a loading or an increase on the premiums you pay every month. If you are unsure of which conditions are covered or not, always make sure to get an expert advise. If you are selecting a with profit endowment policy you may need to be particularly careful as your premium paid every month will tend to be higher than a non profit normal endowment policy. The more you are paying every month, the higher the sum insured, the more particular the insurance companies will be with your medical conditions and history.

Most insurance policies will list the medical conditions that are covered or excluded in the life policies. Make sure you are looking at an updated list as companies may from time to time amend the list of conditions covered. Here again your insurance broker will most probably be able to provide you with the updated list.

There are a number of available options for how to apply for life insurance. The most popular and best way is to do it through an internet broker.

The broker will normally have access to the full market and be able to give you the best policy to suit your needs. In additon to this with the internet being such a competitive place and many websites and companies viaing for your business many of them offer you dicounted prices. If you get a discounted price with the right policy you are in a win - win situation.

Once you have decided on the right polcy for you the broker will normally do the application for you or send it to you to fill in. The application covers general information as well as quite comprehensive medical details. The applciation is then submitted to the chosen insurance provider for them to make a decision as to what they want to do next,

The provider may decide to write to the GP to gather further information, they may decide to write to you and get a more detailed information on something written in the application form or they will take the application at face value and offer cover from there.

Once the information is gathered it goes to underwriting and terms are offered. The terms offered can be standard or maybe have exclusions or increased in premium this normally is dependent on health and family health. Sometimes occupation and hobbies and lifestyle can also affect this.

Once you get your decision it is your choice when you want to start the policy.

Waiver of premium is an option available on your life insurance policy. These must be chosen at the start of the plan and there is likely to be an additonal cost. Waiver is one of the most popular additional benefits. Waiver itself is when the policy provider will pay the policy premiums if you are too ill to work for six months or more through sickness or injury. Initally you will have to maintain the premiums however after a specified time has lapsed, normally 26 weeks of the incapacity the premiums will be paid on your behalf . The waiver of premium will under normal circustances continue until you die, you reach your 60th birtday, reach the end of the policy or if you no longer qualify for waiver of premium anymore.

Waiver can be worth its weight in gold if anything were to happen as it gives total peace of mind and you will not have to worry about your premiums being covered. Afterall in this situation finances will be tight so any help you can get will be a massive help.