- Life Assurance
- Term Assurance
- Waiver of Premium cover
- Terminal Illness Cover
- Whole of Life Insurance
- Critical Illness Cover
- Income Protection (PHI)
- Pensions
Life assurance products come into two main categories:
Term Assurance
Whole of Life Insurance
Term assurance provides the selected level of cover in the event of Death and/or diagnosis of a specified Critical Illness before a predetermined date or age.
As a rate driven contract Term Assurance policies do not offer a cash in value and have no investment element.
Premiums could be guaranteed or reviewable.
Some policies offer additional benefits such as:
Waiver of Premium protection
Terminal Illness cover
Typically means that in the event that the life assured is incapacitated for a period of normally six months or more the premium is paid by the life insurance company until the life assured is able to return to work or until the termination of the policy, whichever occurs first.
The definition of disability can vary according to occupation. For example, you may be offered an "Own Occupation" definition. Which means that if you are unable to perform substantial duties relating to you own occupation you will likely be eligible to make a claim. Less favourable is an "Any Occupation" definition, which means that you may be expected to find alternative employment which you may be able to undertake despite your disability. These definitions become particularly relevant if your incapacity becomes long term.
Your independent financial adviser can help you select the most appropriate cover and advise you further.
Gives the option for the life assured if terminally ill to receive benefits prior to death where the prognosis is that death will occur within either twelve or eighteen months (depending on company).
Term Assurance can take a number of different forms as follows:
Level Term Assurance - Sum assured remains level throughout the term
Decreasing Term Assurance - Sum assured decreases thoughout the term
Gift Inter Vivos - Decreasing Term Assurance that reduces in line with a specific schedule, suitable to protect Gifts (Potentially Exempt Transfers, PETs) often arranged for the purpose of Inheritance Tax Planning and normally placed in Trust
Family Income Benefit - Works on the same principle as Decreasing Term Assurance but is designed to pay a regular income from the date of death until the end of a specified term. Obviously, the longer the life assured lives the lower the total payout. Often used as a cost effective Family Protection plan or could be used to protect maintenance payments received from an ex-spouse for their children
Mortgage Protection Plan - Decreasing Term assurance plan designed to protect mortgages and is flexible enough to cope with changing mortgage interest rates. Therefore, the plan will normally payout whatever the outstanding mortgage balance is at the date of death subject to a maximum mortgage interest rate, normally either 10% or 12% depending on the product provider.
As its name suggests, Whole of Life insurance provides cover on death or diagnosis of a specified Critical Illness for the whole of the individual's life regardless age or future health, just so long as they keep their premiums up to date.
This type of cover is often used to provide cover where the length of time that cover might be required for, is difficult to determine or is indefinite. Often people take out a Term Assurance plan only to find that they still require the cover at the end of the term. If the individual's health has deteriorated in the meantime, it may be expensive or even impossible to re-insure. Whole of Life insurance avoids this problem.
Sometimes Whole of Life Insurance is used to fund a future Inheritance Tax Bill by selecting a sum assured to match the likely Inheritance Tax bill. The cover is placed in trust to the beneficiaries of the estate so that they can then pay the tax bill without having to sell assets such as the family home to pay for it.
Whole of Life assurance can include optional indexation benefits and Waiver of Premium Protection where required and will sometimes include Terminal Illness Cover.
Critical Illness cover is an option that since it's inception in the 1980's has become an important part of a household's protection.
Critical Illness cover is designed to pay out a lump sum benefit in the event of diagnosis of a serious (critical) illness. Companies offer lists of varying illnesses that are covered but all include the ‘big three' which are Heart Attack, Cancer and Stroke. These are normally accompanied by other conditions such as failure of both kidneys, Liver failure, loss of limbs, blindness, Multiple sclerosis, Permanent and Total Disability, etc.
Less people die suddenly these days due to the advances in medical science, yet many people live on with the conditions described above, but may not be able to work, thus putting their standard of living and that of their families at risk. Critical Illness cover offers a means to maintain a reasonable standard of living. For example, it may allow an individual to repay a mortgage or other debts. Alternatively the lump sum benefit could be used to make necessary renovations to the home to help them cope with a disability better.
The options of Waiver of Premium and Indexation are also available under these contracts.
Income protection is often known as Permanent Health Insurance. In this name is a clue that Income Protection is not to be confused with the short term protection you might receive from an accident and sickness policy most commonly sold by the banks and building societies to protect your mortgage payments. These provide cover for a term of either one or two year's maximum and are annually renewable contracts.
Permanent Health Insurance (PHI) offers cover from the date of inception to the stated retirement date and cover is guaranteed throughout the term so long as premiums are maintained. This is far more comprehensive than Accident & Sickness cover policies and with only a few exclusions, normally restricted to self inflicted injuries, drug and alcohol abuse, war & riots, HIV infection and pregnancy.
The cover can be offered with a variety of deferred periods at the beginning of incapacity ranging from 1 day to 52 weeks. This makes it adaptable to an individuals circumstances. For example, if your employer provides full pay in the event of incapacity for the first 6 months then you would not require cover until after your employers benefits cease. This makes it much more cost effective than other types of insurance.
This cover is normally underwritten on the basis of age, occupation and health, but there are some policies which do not underwrite on the basis of occupation, nor do they discriminate between smokers and non smokers. This means they may be more competitive for individuals who fall into either of these categories.
Some policies may even offer a modest investment element which means that when the policy reaches its termination date (normally the planned retirement age), there may be a maturity value. The amount payable at maturity will depend upon the investment return of the investment element. Remember that the value of your investment may go up or down. The amount available will not be guaranteed and these arrangements should not be relied upon as savings plans. The amount recieved back at maturity may be less than the contributions paid.
PHI policies normally offer the option of Indexation and Waiver of Premium is normally provided at no extra cost. The option of guaranteed or reviewable premium rates is normally available. Reviewable premium rates may assessed on the claims history of the company and national morbidity rates, but not usually on the individuals personal claim history.
Income Protection Enquiry Form
Pensions are savings funds which, with the assistance of generous tax relief allow individuals to build a fund of money which can be used to provide a lump sum and income at the point of retirement.
New legislation known as Pensions Simplification introduced a raft of changes to retirement planning on 6th of April 2006. The new legislation aims to bring all the different pension regime's under one set of rules. Briefly the main features are as follows:
Tax Relief on Contributions up to the prescribed limits below:
22% minimum regardless of whether they are tax payers or not. With effect from 6th April 2008 basic tax relief will reduce to 20%
Higher Rate tax payers benefit from up to 40% tax relief
Tax Free Cash Sum at retirement of up to 25% of the value of the fund
Income in retirement which can be taken in a number of ways using the Traditional Annuity, With Profits Annuity, Unsecured Income, Phased Drawdown and Alternatively Secured Income (GAP Financial Management will be happy to discuss some of these option with you in more detail upon request). Retirement income is treated as "earned income" for tax purposes and will be chargeable to Income Tax at the individuals highest marginal rate.
Lifetime Limit - Currently £1.6 million. This is the maximum contributions that can be made to a pension during an individuals lifetime.
Personal Contributions of up to 100% of salary
Employer contributions of up to £215,000 (subject to acceptance by the local inspector of taxes)
It is worth noting that contributions are only limited to the extent that where these limits are exceeded adverse taxation will likely apply or tax relief will not be available.
Self Invested Pensions (SIPPs)
A Self Invested Personal Pension as the name suggests, allows self investment into a wide range of asset classes in addition to the default pension funds available in the plan. The assets include*:
OEICs (open-ended investment companies)
Unit Trusts
Investment Trusts
Quoted Stocks and Shares
Commercial Property
Mutual Funds
*List not exhaustive
SIPPs can be useful for people running their own business where they wish to buy the business property. Rather than paying rent to a third party you may prefer to use your pension to purchase the property and then rent the premises from your pension instead. Benefits include, exemption from Capital Gains on Commercial Property held within a SIPP, tax relief on rental payments in additional to maximising your personal pension contributions and growth on the value of the property assets in your pension.
Further, if you do not have sufficient funds within your pension to complete the purchase you may borrow up to 50% of the value of your fund.
Alternatively, you may just prefer to take control of the investment of your pension by choosing your own assets from the range of permitted investments listed above.
Investments can take different forms including the following:
OEICs
Unit Trusts
Investment Trusts
Investment Bonds
Individual Savings Accounts (ISAs)
PEP Transfers
All the above use mutual funds managed by fund mangers making the more specialist investment decisions for you, while your adviser selects the the most appropriate funds based upon charges, performance, your individual attitude to risk and your investment objectives, i.e. growth or income.
The taxation of the above products investments varies but in particular ISAs and PEPs are very tax efficient as they are invested free of Income and Capital Gains tax.
PEPs are no longer available for new investment but may be transferred from one provider to another. If you own PEP investments, now may be a good opportunity to review how these are performing to see if they are still achieving what you originally intended.
Individual Savings Accounts enjoy major tax advantages;
No tax paid on the income you receive from your ISA savings and investments
No tax paid on capital gains arising on your investments
You can take your money out at any time (but some types have a notice period)
You do not have to tell the Inland Revenue and Customs about income and capital gains from ISA savings and investments.
There are two basic types of ISA; Maxi and Mini. Mini ISAs are only able to offer one element - stocks and shares (up to £4000) or a cash deposit (up to £3000). Maxi ISA's may also offer a cash deposit element but this is not compulsory. The whole of a Maxi ISA may however be invested in stocks and shares and this is the form of ISA that most providers offer.
A person may choose to invest in one Maxi ISA or in two separate Mini ISA's in any tax year. Maxi and Mini ISA options may not be mixed however, so it is not possible, say, to invest £3,000 in a stock and shares Maxi ISA whilst effecting a £1,000 cash Mini ISA with another provider, even if the Maxi ISA provider does not offer a cash option.
From the 6th April 2008, the rules change. There will no longer be the option for Mini or Maxi ISAs, they will just be known as ISAs. The limited will increase to £7,200 per individual and will allow up to £3,600 in cash with the balance as 'Stocks & Shares', or you can invest up to the whole allowance in 'Stocks & Shares'. There has been a proposal to reduce the the ISA limits but this has been withdrawn and these will now continue until at least 2010.
OEIC stands for open-ended investment company. An OEIC has a company structure, so that when you invest, you will hold shares. It's open-ended, which means that the fund can get larger or smaller, depending on the number of investors who wish to buy or sell shares. Many investment funds in the US and Europe have a similar legal structure.
OEIC's are a relatively new form of investment vehicle. They are increasingly replacing unit trusts, which are very complex in legal terms - having originally been invented to protect the assets of knights who were away on the crusades! One advantage of an OEIC fund is that it has a single price, directly linked to the value of the fund's underlying investments. All shares in the fund are bought and sold at this single price. This contrasts with unit trusts, which have different buying and selling prices.
A unit trust is a pooled fund for investors to buy shares. This limits risk for the savers as their pooled money is spread over a range of investments. Unit Trusts are different to investment trusts because unlike an investment trust where there are a set number of shares which fluctuate in value, a Unit Trust can shrink and grow according to demand. Basically the value of your investment always reflects the value of the underlying assets.
Unit Trusts entitle an investor to participate in the assets of the trust, without actually owning those assets. The fund's assets are protected by an independent trustee and managed by a manager.
Investment Trusts are companies whose value fluctuates with demand for their shares on the stockmarket. The cost of an investment does not necessarily equal the price of its underlying assets, rather the perceived value. The idea is that you invest in an Investment Trust and make or, indeed, lose money depending on how the trust's investments perform.
An insurance bond (or investment bond) is a single premium life assurance policy used for the purposes of investment. Bonds can provide income or growth and have access to a wide range of investment funds. The tax advantages offered by bonds attract investment normally after the tax free ISA limit has been used. For example, both basic and higher rate tax payers can withdraw up to 5% of the initial investment each year as ‘income' without any liability to income tax.
This is because the ‘income' is considered repayment of capital by HMRC and so is not considered taxable. This makes insurance bonds an attractive investment vehicle for Higher Rate tax payers. Basic rate savings tax (20%) is paid from the fund so for most Basic rate tax payers there is normally no additional liability unless the gain takes them into higher rate, in which case they will be liable to the difference between basic and higher rate tax (currently 20% as tax deducted in the fund is investment rate). Tax on any gain is deferred for up to 20 years. Insurance Bonds are often used in conjunction with Inheritance Tax Planning using trust based products such as Discounted Gift Trusts and Loan Trusts.
The value of your investments may go up or down
Past Performance is not necessarily a guide to future returns
Some financial products do not acheive a surrender or maturity value
Before purchasing a financial product we recommend that you that you seek advice an Independent Financial Adviser
Before making a decision you should take the time to sudy any illustrations and Key Features documents you should be provided with prior to applying for any financial products
