Things you should know about Life Insurance

Life insurance offers valuable financial protection in the event of your early death if you have family dependent on your earnings. But it can also be a means of saving. This combination of protection and saving makes life insurance unlike any other financial product.

Some policies protect, some help you to save and some do both. This page describes the different types of life insurance available as a means of saving.

Life Insurance as a form of saving and protection

The long-term nature of life insurance allows you to make clear plans for long-term saving. Life insurance companies have long and wide experience of successful investment as well as providing protection in the event of your early death.

Endowment Insurance

This both protects your family and saves for the future. Although dearer than protection insurance alone it will help your family’s finances should you die, while at the same time it is a method of long-term saving. Endowment policies can be issued on a with-profits or unit-linked basis (see below). You pay premiums for an agreed number of years say 10, 15 or 20. At the end of this time you receive a lump sum, which is either the sum insured together with bonuses in the case of a with-profits policy, or - with unit-linked endowments - the lump sum is the return of all money invested together with the investment growth. If you die before the maturity date the insurance company will pay the sum insured, or the value of the policy at that time if greater.

With-profits

A with-profits fund is a pooled investment, where the money you pay in (the premium) is pooled with other premiums and invested by the insurance company in a very wide range of assets. These will include stocks and shares, bonds, government bonds, property and cash. The investment return you policy pays is smoothed so that you are sheltered from the more extreme variations of direct investment. The investment growth achieved by the with-profits fund is paid to you as regular and final bonuses and added to your policy. Once bonuses have been added, they cannot usually be taken away.

Growth and bonuses cannot be guaranteed in advance but it is likely that bonuses will add significantly to your sum insured, bringing you a good investment return over the years of your policy. The with-profits endowment policy is a means of regular long-term saving with a minimum of risk and the potential for a good return. It smoothes out fluctuations in the value

of investments, although there is no guarantee of the final (maturity) value of the policy.

With-profits bonds are another way of investing in with-profits funds by paying a single premium.

Unit-Linked Policies

With a unit-linked policy there is no guaranteed sum insured payable except in the case of death. The insurance company invests your premiums in specific funds chosen by you. The amount payable under your policy depends on the value of the investments in those funds at the time your policy matures. Insurance companies offer a range of different funds to which your policy can be linked. You should ask for an explanation of the different funds so that you understand the different risks and opportunities.

There is no guarantee of the value of the sum to be paid on maturity. The potential benefit from a unit-linked policy can be greater than from a with-profits policy. But of course there is also the risk that the eventual benefit could be lower. The value of investments can fall as well as rise.

Bonds

A bond is an investment usually purchased with a single premium lump sum, although regular payments can sometimes be made. Your payments are invested by the insurance company either in its with-profits fund or as a unit-linked investment (see above) where you can choose the fund it is linked to.

A guaranteed income bond pays you an income at a guaranteed rate for the duration of the bond. It then returns your remaining capital on the maturity date.

With unit-linked single premium bonds your premium is allocated to one or more funds rather than to the single with-profits fund (see above). The eventual return you receive depends on the movement in the unit prices over the period of the policy. Insurance companies offer a range of different funds to which your policy can be linked. You should ask for an explanation of the different funds so that you understand the different risks and opportunities.

Optional Extras

Most life policies have optional extras:

Waiver of premium – If you cannot follow your normal occupation because of illness or injury, the insurance company will pay your premiums to maintain the benefits under the policy.

Critical Illness – This provides cover against the risk of you having a serious illness such as a

heart attack or cancer. If you develop one of the illnesses listed in the policy a lump sum (or occasionally a regular income for a set period) will be paid. This type of insurance can be bought on its own or as an addition to whole life, endowment or term insurance.

Income Tax

Provided your policy is a “qualifying policy” the benefits paid on death or maturity are not subject to income tax. To qualify, a policy has to satisfy certain statutory conditions. These include the need to pay premiums at annual or shorter intervals for at least 10 years or until your earlier death. Your sales person, adviser or insurer will tell you whether or not your policy is a qualifying one. The surrender of a policy within the first ten years may result in a liability to pay some income tax.

Who Can Sell Life Insurance?

Any person advising on or selling investments must be authorised by the Financial Services Authority as either a company representative or an independent financial adviser. The sales person will make his status clear and explain whether he is authorised to offer the products of one company only or whether he can advise on a range of different companies’ products. Insurance companies deal direct with potential customers either by telephone or through their sales persons but it is also possible to buy through independent financial advisers or other insurance intermediaries.

Are there controls over selling life insurance?

Sales are governed by the rules of the financial services regulator – the Financial Services Authority.

Assessing Your Life Insurance Needs

A life insurance policy is a long-term commitment. It is not designed for you to cash in early. Insurance companies and other financial advisers can help you decide what products are suitable for you. Never surrender a life insurance policy without taking expert advice.

When you have decided on a policy you will have to complete and sign a proposal form. This form may ask about such matters as your age, occupation and health.You must answer all questions truthfully. If you fail to do so, it can, in some circumstances, mean that your policy will not pay out.

What if I change my mind?

Every effort is made to ensure your application for life insurance is made in the full knowledge of all its terms and conditions, but all these policies have a “cooling off” period (of at least 14 days). During this time you can tell the insurer you do not want the policy and receive a refund of any initial premiums you have already paid. With unit-linked policies it may not be the full amount you originally paid if the value of the units has decreased since purchase.

What should I do if I want to complain?

Occasionally things go wrong and you might want to complain. You should in the first instance take your complaint up with the salesperson, adviser or insurer. Your policy document will provide details of the insurer’s complaint arrangements. The aim will be to ensure that your complaint will be thoroughly investigated at the right level.

If you are not satisfied with the way they deal with your complaint, you can contact the Financial Ombudsman at:

South Quay Plaza
183 Marsh Wall
London E14 9SR

Complaints Procedures

Tel: 0845 080 1800
Fax: 020 7964 1001