Insurance Example 6

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Insurance Example 6

John Brock took out a convertible term assurance over 15 years with a sum assured of £120,000 when he was aged 30 and in good health. Ten years later he suffered a coronary thrombosis. This meant that if he had had to take out a new policy in the ordinary way the company would have required a medical report and would have charged an increased premium for any policy he wanted. (It could even have refused to provide any further cover.) For a 20-year with-profit endowment this "loading" could have increased the annual premium for a £500,000 sum assured from £1550 to as high as £1700. But by exercising his convertibility option, he is able to take out the policy at the normal premium rate.

There is usually a maximum age at which conversion can take place as well as a time limit within the term of the original contract itself. The value of convertibility is greatest for the young married person who cannot now afford a with-profit policy but would like to take one out when his or her earnings increase (possibly in connection with house purchase: see Section 7). If one is sufficiently affluent to be able to afford both the protective life cover one needs and a long-term with-profit policy, there is less benefit to be derived from conversion options. But the low cost of the option to convert makes it well worth having for many people, if only because of the eternal uncertainty of the future.

While it is a reasonable exercise to compare pure protective insurance policies in relation to benefits provided per £1 of premium, things are not quite so simple with convertible term. Here the performance of any future with-profit policy into which one converts is also relevant. The cheapest convertible term policy in terms of benefits per £1 of premium may be issued by an office which does not do very well in investment terms and thus produces lower maturity values on its with-profit policies than its competitors whose convertible term premium rates are higher. In selecting a convertible term policy it therefore makes more sense to choose one issued by one of the companies known to produce good with-profit maturity values, even if the cost is slightly higher.

Because the amount of premiums on pure protection policies is quite low (unless the sum assured is very substantial) life insurance companies tend to produce protection "packages" rather than selling the policies separately. Another reason is that the cost of "putting a policy on the websites" - the documentation and registration - is much the same for any policy regardless of type or amount of premium. A typical package might include elements of FIB and term assurance with an option to increase the benefits insured. Another benefit sometimes included is "waiver of premium". This means that if the policyholder is unable to work through illness or disablement the company maintains the policy in force without any payment of premiums until the policyholder is able to work again. Because of the fixed costs of issuing policies, many companies today have a minimum monthly premium - £12 is not unusual. This may well purchase cover in excess of the decreasing term benefit necessary to cover a mortgage, for example. Rather than simply increase the initial sum assured, one way of using the premium is to extend the term of the policy. This would cover any extension of the mortgage loan and also provide an extra margin of cover for the family.

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Insurance Example 5

Mr and Mrs Argent are in their early 40s and have two children aged 12 and 15. Apart from mortgage protection they have no life insurance. To provide for his wife and family while the children are still dependent, Mr Argent takes out a 10-year FIB for £12,500 p.a. at an annual cost of £133. To provide financial security for his wife, he also takes out a level term assurance for £120,000 over 20 years at a cost of £11114. The total annual cost after tax relief is £11121.27.

There are several other variations on the term assurance theme. Normally a policy is... see: Insurance Example 5

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