Your money -Insurance survey: Matters of life and death

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The Independent Culture
Abigail Montrose says life insurance is not just essential for your family, it can make for a good low-risk investment

A death in the family is not only emotionally devastating, but it can also lead to financial hardship. Anyone with dependants, such as children, an elderly relative, or a partner who relies on them to help meet the bills, should have life insurance.

Life insurance pays out a lump sum in the event of your death. In the case of a parent dying the money could be used to help protect the family's lifestyle, paying off a mortgage, perhaps providing an income, paying for help around the home and childcare or covering the costs of education.

The amount of life cover you need will depend on your individual circumstances. It could be the same amount as your mortgage or, if you are looking to provide your family with an income, then 10 or more times your annual earnings may be a suitable amount.

There are two main types of cover: term insurance and whole of life.

Term insurance is life cover for a set period of time and you can buy high levels relatively cheaply for a fixed number of years. Typically, you may want to take out term assurance for 25 years to cover the period when your family is growing up or while you are paying off a mortgage.

Usually premiums are a fixed amount throughout, but some insurers now have "progressive pricing", where the premiums start off cheaply but rise throughout the duration of the cover. Royal SunAlliance, for example, would charge a 34-year-old male non-smoker pounds 38.71 a month for pounds 200,000 of cover. But if the man wanted progressive premiums he would start of paying pounds 15.03 a month with the premiums being reviewed and increased each year. Women can usually expect to pay considerably less as they have a longer life expectancy.

Whole-of-life cover is permanent life assurance which pays out on your death at any age. If your policy is a with-profits whole-of-life plan, annual bonuses will be added to the sum assured each year. The actual payout in event of death will increase each year as these bonuses are added.

As you get older it can become more expensive to get life cover. So if you want whole life cover, perhaps because you want to ensure your heirs receive a lump sum on your death or to pay for inheritance tax, you could consider straightforward whole of life without profits. This is more expensive than term assurance. In our example above, Royal Sun Alliance would charge the 34-year-old man pounds 118.80 a month for pounds 200,000 whole-of-life cover.

"However, these policies are primarily for protection rather than investments," says Vivienne Starkey, of independent financial advisers Haddock Porter Williams. "If I was looking at investments I'd be looking at more than just life insurance companies - I'd also look at specialist investment houses. Those companies offering the best life assurance rates don't necessarily offer the best investment funds."

While life assurance is primarily about protection, with profits policies are also a low risk investment. Providing a life insurance policy can be held for at least 10 years, and is actually held for at least three quarters of this period, any pay-out from the policy is tax-free. As a result, insurers offer policies that are primarily investments but have an element of life cover. "The best known of these is the with-profits endowment policy," says Nigel Webb, of Equitable Life. "These are principally savings vehicles with an element of life cover. Typically, they are used for repaying a mortgage."

With these policies the bulk of your monthly premium is invested in the insurance company's main investment fund while a small amount goes to pay for the guaranteed life cover. The policy is a fixed-term contract and the life cover ceases when the policy matures.

With-profits funds have traditionally been the most popular because they are low risk and allow investors to share in any profits made on investments by the insurance company. Each year, the insurance company will pay out a bonus which is attached to your plan. This cannot be taken away and increases the value of your guaranteed sum assured.

On top of these annual bonuses, you will receive a terminal bonus when the policy matures. The terminal bonus is based on how well the fund is performing and can be worth anywhere up to 60 per cent of the final pay- out you receive. Cash in the policy early, and you will lose this valuable bonus with most insurers, as well as having paid the company's charges, so to get the most out of your policy you should keep it going until maturity.

The Association of British Insurers (ABI) has published a factsheet on life assurance. Free copies are available by calling the ABI on 0171- 600 3333.

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