Protection Plans: Term and Whole of Life

Term Assurance and Whole Life Plans

A death or serious illness in a family can have many sad consequences and not all of those consequences can be alleviated by financial means. No amount of money can bring back a loved one who has died or ease the feelings of a spouse or partner caring for someone who is seriously ill. The effect of death or serious illness can be made much worse if it also brings with it financial difficulties, at a time when those affected feel least able to cope with them. By making adequate financial provision through the use of the various protection policies that are now available, the adverse financial consequences arising from death, sickness or disability can be mitigated.

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    With level term assurance, the sum assured remains constant throughout the term. The sum assured will be paid out on death during the term. The policy will cease at the end of the term or on earlier death, if applicable.

    With decreasing term assurance, the sum assured reduces to nothing over the term of the policy, usually by equal amounts.

    A family income benefit policy is a type of level decreasing term policy. The aim of the family protection is often to replace income lost on the death of the breadwinner. A FIB policy is designed to meet this need by providing income rather than a lump sum. The policy may pay out a tax-free regular income from the date of death of the life assured until the end of the chosen term.

    The most common use of decreasing term assurance is to cover the amount outstanding on a repayment mortgage.

    A gift inter vivos means a gift made during a donor’s lifetime (as distinct from on their death). Under Inheritance Tax rules, inheritance tax is immediately due when such a gift is made from one person to another, but it will become due if the donor dies within seven years of making the gift. The amount of tax is scaled down from the fourth year onwards. The cover on a gift vivos term assurance is designed to provide an amount enough to pay the inheritance tax when the donor dies within seven years of making a gift.

    This works as the title suggests, instead of remaining level or decreasing, the cover increases during the term. This type of policy can be used where temporary cover of a fixed amount is required but the cover needs to increase to take some account of the effects of inflation on purchasing power.

    As the name implies, is designed to cover the life assured for their whole lifetime. It pays out the amount of cover in the event of the death of the life assured, whenever that death occurs, provided that the policy remains in force. Whole-of-life policies are commonly used to provide financial protection for self and dependants, and to protect the value of the estate on death from inheritance tax.