Till Death Us Do Part

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Till Death Us Do Part

Whereas term assurance offers protection over limited periods, permanent protection is provided by the whole-life policy. Here the company guarantees to pay the sum assured on death whenever this occurs in return for the payment of fixed annual premiums throughout life.

 

Though premiums are frequently made payable only up to retirement age or to age 65, the company is taking on a risk, as in term assurance, that the policyholder will drop dead the day after starting to pay premiums; but it is also taking on a certainty, the certainty that the policyholder will die at some time. Since the sum assured is, therefore, definitely going to be paid out at some point, the policy can be regarded as building up towards this ultimate point, and it therefore acquires a surrender value.

 

If after a few years the policyholder wishes to stop paying premiums he will get something back from the life insurance company, and if he wishes to borrow against the security of the policy he may be able to do so.

For a young man, the expected date of payment of the sum assured is so far in the future that the surrender value in the early years is very low. The actuary can calculate it, for example, by working back from the sum assured which is assumed payable on death at the date corresponding to average life expectancy.

 

This discounting process works like compound interest, only in reverse, and, the longer the period to elapse before the payment of the relevant sum, the smaller the sum it will be reduced to by the process. A deduction will then be made for expenses and for premiums that will not be paid before arriving at the surrender value.

Since the sum assured is definitely payable at some point, the non-profit whole-life policy can be looked at as a combination of a decreasing term assurance and a fixed-interest savings plan. For a young man, the bulk of the premium in the early years provides the term assurance, and a small amount is "invested". But as the fund increases, and the need for term assurance shrinks, so more is "invested" right up to the expected date of death when the savings plan has reached the sum assured.

Given this necessity to accumulate the funds to pay out the sum assured at the date of death, it is easy to see why the premiums per £111,000 of cover rises with age and why the surrender value on a policy taken out at age 50 will increase more rapidly than one taken out at age 20. The graph in Fig.2 shows the relation between assurance and savings for a managed 30 at entry, and from this it will also be seen that the surrender value climbs very slowly indeed in the first 10 years.


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Taxation

The sums provided as benefits by pure protection policies are normally free of income tax. But there are important differences. For example, the lump-sum benefit provided by a term assurance policy is free of tax. Of course, as soon as it is invested to earn an income then the income is taxable at whatever rate of income tax the recipient is liable. On the other hand, the annual benefits paid under FIB policies are instalments of capital rather than income, so they are not liable to income tax at all.

In the case of benefits payable under an individual permanent health insurance policy,... see: Taxation

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