Insurance is a means of protecting the loss or costs caused by an event that may or may not happen. Insurance coverage is by a contract in which one party, the insurer, agrees to indemnify or reimburse another, the insured, for loss that occurs under the terms of the contract.
In exchange for payments from the insured, called premiums, the insurer agrees to pay the policy holder a sum of money upon the occurrence of a specific event.
Life Assurance
As an individual’s death is certain or assured to happen then Life Assurance is the phrase used to cover your full life insurance.
- Life assurance provides a lump sum when you die.
- If you die early your family or beneficiary will collect the lump sum. If you live to a ripe old age the lump sum is still paid on your death and can cover funeral expenses, inheritance taxes, mortgage or other liabilities.
- You can nominate who you want to be the beneficiary of the lump sum but this needs to be in accord with your will.
- Life Assurance can be seen as a long term saving plan. As your policy will be paid out at some unknown future date it always has a value. So the policy can sometimes be sold for a cash value (and someone else takes up the premiums and benefits) or surrendered for a lump sum.
- Some policies have bonuses added based on performance of the underlying investments. However the cost to the insurer of some people dying earlier than expected has to be set against contributions and the interest/dividends that money makes for the insurer.
- Premiums will reflect the amount insured and the length of time premiums are likely to be collected. Using life expectancy tables insurers work out how much you will pay and give or take growth due to interest that is the amount they will insure you for – you do not get out more than you put in unless you die early.
Term Life Insurance
This is a useful type of insurance against you dying within a specific time or set number of years. It can be used to cover financial responsibilities like the period before your children finish school or to repay a mortgage if you die during the mortgage period. It can be used to create a capital sum to replace your regular income earnt whilst alive.
If the term is short and you are young and fit the premiums will be cheap – most people will never need to claim and that is taken into account when setting premiums.
If you are just protecting a mortgage or debt you can arrange a diminishing level of Term cover as the debt is repaid in the normal course of events.
