UK Life Assurance in Relation to Personal Finance - Term Paper Example

UK LIFE ASSURANCE IN RELATION TO PERSONAL FINANCE By of the of the of the School 28 March,2015 Introduction Life assurance businesses are thriving sectors in the UK economy. They are concerned with providing financial securities to the individuals in the community through insurance. Uncertain of the future and with the desire to live less stressful lives in case of unknown death incidences, majority of adults and families now resort to life assurance policies. Death is certain for every individual, but with increasing risks and exposure to various diseases and accidents, citizens need to assure their lives and those of their loved ones. Through the life assurance policy, an insurance company gets into a contract with a client who pays a specified premium so as to have his life or that of his loved ones assured. Upon death of one of the insured individuals, payment can be claimed from the insurance company. These claimed payments assist the remaining individuals by easing their financial strain. For example, it can cater for child care costs or mortgage, in case the insured died while these things were still unsettled. Life assurance is permissible in UK’s market under the Life Assurance Act C. 48, which is an “Act for regulating Insurances upon lives and for prohibiting all such Insurances except in cases where the Persons insuring shall have an Interest in the Life or Death of the Persons insured” (legislation.gov.uk, n.d.). This paper identifies and discusses the key elements of, and issues relating to Life Assurance in the UK in relation to personal finance. Conditions for Life Assurance Companies There are numerous life assurance companies including Aviva, UK Life Assurance Company, Great Britain Mutual Life Assurance Society and AIG companies among others. Though investors in the assurance businesses have similar objectives (with the greatest being to make profit) as in other types of businesses, there numerous risks involved. UK’s law demands that a party or person or business qualified to write a life assurance business: “be a ‘person’ authorized under FISMA or the 1982 Act, a member of Lloyd’s, registered or incorporated friendly society, trade union or employers association providing provident benefits, or a company incorporated in or formed under the law of a member state of the European Communities, whose head office is in that state, authorised in accordance of Article 4 of the Life Assurance Directive and complied with the requirements of Part 3 of Schedule 3, or of Schedule 4, to FISMA or (before 1 December 2001) of Part I of Schedule 2F to ICA 1982” (HMRC, n.d., p.1). Elements of a Life Assurance Policy 1. Amount of cover This entails the lump sum cash that one wants paid upon death of the insured. It is the insurance purchased and a critical factor to consider before buying a life insurance policy. Depending with the product provider, clients can either choose a sum assured of their choice after evaluation either from a fixed or a particular range provided. This sum assured is what is offered to one’s beneficiaries upon the policy holder’s death. In other words, it can be as cheap or expensive, but beneficial dependent on personal finances and expenses. Insurance providers set a minimum and maximum amount of life insurance cover they can provide. The maximum available cover by Aviva is £500,000, while Legal and general protection is down to £300,000 (AVIVA, 2013). 2. Type and length of cover required Based on one’s needs and reason for taking a cover, there are a range of life insurances that best fits the individual. Some reasons entail payment of mortgage debt, other debts upon death, or simply family protection. Term life and whole life insurances are the two major options, where the former covers for a set period of time (e.g., 2-10, 10-15 or 20-30 years range), while the later offers protection for a lifetime until death (Birds, 2010). Insurers state their minimum length of cover, which often may be 12 months since the policy comes into effect. Under term assurance, there is level term life, deceasing term life, joint life, renewable term and family income benefit insurances, while in whole life assurance there are reviewable, with profit and non-profit whole life insurance policies (Which, n.d.). Joint covers are suitable for civil partners in businesses or marriages where one partner is deemed to suffer financial losses in case the other dies within the stated term. These sub products may differ with the insurance company, but each is suitable to meet specific needs for the client. For whole life insurance, irrespective of the time the insured dies, the cover will still pay out. 3. Number of persons covered This is where the insurable interests are specified. Most individuals consider their own lives and those of their immediate relations. Insurable interests address the question of whom the life insurance policy is purchased for. For its essence in the policy’s existence, the “statutes require policyholders to show a requirement of insurable interest in the subject matter they were insuring” (justice.gov.uk, n.d.). If marriage, the interest is a fiancé or wife, and where relation is by blood it could be siblings. Other examples of what gives rise to insurable interests are business relations and creditor debtor relationships, where a creditor or business partner can be a beneficiary following the death of the debtor or business owner in a partnership respectively. 4. Factors affecting pricing of premiums The policy is provided with a schedule that specifies the date the policy came into effect and contract used in payment of premiums. Most policyholders prefer regular premium contracts paid at regular intervals (monthly or yearly) to the insurer for the term covered, However, there are single premium contracts payable once at the initiation process, and recurring single premium flexible enough for policyholder’s contributions. Policy holders can pay fixed premiums, but insurers also provide the option for alteration (often based on inflation, personal income and affordability). The basic average regular life insurance premiums start at £6, but risk exposed policyholders like smokers and diagnosed individuals with medical conditions could be raised to approximately £8 or over. 4.1. Age of the insured The age of the insured is vital because its assists to determine the sum assured and the rates charged for life insurance. During claims, the insurer has to verify the birth date of the life assured, which assists to recalculate the level of benefits and actual premium paid (NFU Mutual, 2014). Most insurers avail the policy to individuals aged from 18 to 60s. The age of the individual seeking life insurance matters because risk of death is considered higher as people grow older. Therefore, much older people get to pay higher premiums than the eligible younger ones. 4.2. Is the insured a smoker? Smoking habit is considered lethal and highly taxed in UK. It negatively affects both the life of the insured and the pricing of his life insurance. Smoking habit exposes the smoker to a range of chronic and terminal illnesses, such as cancer and cardiovascular diseases. For the insurance companies, smoking is a behaviour that risks high mortality rate, implying that chances are high that they will pay out. On average, a smoker will pay a higher premium than a non-smoker to adequately fund for his cover. Based on life insure report, Prime states that “smoking affects the size of life insurance premium where providers charge a smokers premium to anyone who smoked in the last 12 months and through charges for categorized smokers into insurance band (standard, preferred and preferred plus) depending on their level of health” (n.d., p.3). Obviously, intensive smokers may end up paying more annual premiums than the other new smokers. 4.3. Insured’s state of health and medical history Most insurers require the policy holders to disclose their information on pre-existing medical conditions to understand the current risks. If need be, the policy holder may also need to disclose family medical history such as inherited or genetic conditions of the immediate family members insured (Genetic Alliance UK, 2012). Failure to disclose such information based on some insures’ rules can result to failed pay out upon claim in the name of ‘non-disclosure’ excuse. Guided by the Concordat and moratorium on genetics framework, insurers can access genetic information and testing results for assessment of life insurance cover of the individuals. According to the HM Government and ABI, “relationships between insurance underwriting and medical information need be proportionate and based on sound evidence (inclusive of medical examination),” and where under the commercial principle, this relevant information would support in fair pricing of the cover (2011, p.2). Considering the risks associated with a current or inherited medical condition, policy holders get to pay higher premiums than the average depending with the insurers’ products. 4.4. Insured’s occupation Insurers also require the policyholders or insured occupation information in order to assess prices for life insurance cover. There are considered high risk occupations (like pilots, army service personnel and fire fighters among others) by insurers, which may attract expensive life insurance than normal because premiums are set higher. Issues Relating to Life Assurance 1. Inheritance tax (IHT) and liability Inheritance tax affects the maximum possible benefit family beneficiaries can get upon death of the insured. Unfortunately, due to unawareness or poor life insurance arrangements, beneficiaries of sum assured find themselves in surprises upon revelation of their exiting IHT liability. Failure to put a life insurance policy into a trust, where the expected benefits reach inheritance tax threshold, provides an opportunity where government institutions get to tax the life insurance contract. Referring to Christopher Little Co. Financial Advisers, life insurance contracts are tax free in the UK, but where the estate and wealth left to the beneficiary exceeds “£325,000 inheritance tax threshold, there is a tax payable at 40 percent on any part of the estate above the threshold level” (n.d., p.1). By writing the insurance policy in trust, beneficiaries can be acquitted from the inheritance taxes on their benefits. Rather than benefits being handled by the legal estate, all the proceeds are directed to the beneficiaries and not factored in for inheritance tax calculations. There are exceptional cases where writing policy in trust is unsuitable, especially where it is used as security to loans obtained from the lender e.g., mortgage provider. IHT calculations Some beneficiaries inherit tax free estates while others are victims of IHT through the estate’s liability. Calculation of the IHT is done in consideration to the whole amount of wealth and its value left by the diseased. To assist the policyholders evaluate whether their estates are liable to IHT in the UK, they calculate for the net value of their owning after deductions of debts. For example, the final value of the estate is equal to: Value owned (Personal property+ personal Savings+ house value + value of life insurance policy+ existing investments+ Eligible gifts (money or valuable property) within 7 last year term) less deductions(mortgage and equity debts, other types of loans, income tax pending, money offered to charity, unpaid bills) (Lewis, 2014). Provided the policy is written in a trust and final estate’s value does not exceed the threshold, no taxes will be charged. However, in case the second couple dies and the estates’ value exceeds the £650,000, the beneficiaries’ heirs are taxed in relevance to the law in UK. The current thresholds (£325,000 and 650000) according to Lewis have been applicable for the period of “6 April 2009 to 5 April 2018” (2014, p.6). Charges on transfer, transfer of value, rate bands, dispositions and exempted transfers are covered under UK’s Inheritance Act of 1984, C.51. 2. Termination of policy At the event where the covered term elapses and the policyholder is still alive, the policy cover terminates, implying that when the policyholder outlives the 10 years insurance cover purchased, they are not eligible for claims of any pay out. Only few insurers offer the limited bonuses for livings past the termination date of the policy. The second case pertains to failure to pay the premiums on the specified due dates on the schedule. Insurers offer the policyholders a specified grace period to pay the outstanding debt of the skipped premiums. If the grace period elapses, premium defaults can be subjects to termination of the policy, and depending on the insurer, this can result to certain accrued charges. Aviva life insurance provides 31 days grace period, failure to which its terminated. Third, falls under the insurer exclusion claim that the insured committed suicide. For example, HSBC requires that “if the Life Insured commits suicide within12 months of the commencement date of the Policy shown in the Policy Schedule, the Death Benefit will not be payable” (2014, p. 8; NFU Mutual, 2014). Finally, provided the policy holder or the insured dies within the covered term or as specified in whole life insurance policy, once the sum assured is paid out, the insurance policy terminates. 3. Cancellation and making claims Insurers provide for the cooling off period upon which the policyholders can make up their minds to cancel the policy for their known reasons. Aviva provides for 15 days including the day the contract was entered, while HSBC offers 30 days where the full premiums paid in the period are refundable. To make claims, the beneficiaries notify the respective insurance company upon the death of the policyholder or insured. Upon satisfactory proof death, only then will insurers release the pay out to the legal beneficiaries and terminate the contract. The release of the benefits may be affected by the delay provision if it did exist in the contract. Conclusion Policy holders have a variety of life assurance products in the UK market from which they choose from to meet their intended needs. These products are flexible enough to insure family relations or business partners for intended reasons like catering for school fees, child care, mortgage and payment bills among others. There are factors that determine the premium pricing ranging from age, smoking behaviour, existing illnesses and occupational risks. Policyholders specify the length of cover, type of cover, individuals insured and amount of cover. Issues related to life assurance policy entail IHT, cancellation, insurance claims and exclusions to pay out. References AVIVA, 2013. Frequently Asked Questions: Public Officers Group Insurance Scheme (POGIS). [pdf] Available at: [Accessed 28 March 2015]. Birds, J., 2010. Insurance Law in the United Kingdom. New York, NY: Kluwer Law International Publishers. Christopher Little Co. Financial Advisers, n.d. Guide to Writing Your life insurance Policy under Trust. [pdf] Available at: [Accessed 29 March 2015]. Genetic Alliance UK, 2012. Genetic conditions and Insurance: What you need to know and what you need to tell. [pdf] Available at: [Accessed 28 March 2015]. HM Government and ABI, 2011. Concordat and Moratorium on Genetics and Insurance. [pdf] Available at: [Accessed 29 March 2015]. HMRC, n.d. Chapter 2: General structure for life Assurance Taxation. [pdf] Available at: [Accessed 28 March 2015]. HSBC, 2014. HSBC Life Cover (Level and Decreasing) Everything You Need to know for: personal Protection and Business Protection. [pdf] Available at: [Accessed 28 March 2015]. justice.gov.uk, n.d. Part 1: Introduction. [pdf] Available at: [Accessed 29 March 2015]. legislation.gov.uk, n.d. Life Assurance Act 1774. [online] Available at: [Accessed 28 March 2015]. Lewis, P., 2014. Taming Inheritance Tax. [online] Saga magazine. Available at: [Accessed 29 March 2015]. NFU Mutual, 2014. Policy Terms and Conditions. [pdf] Available at: [Accessed 28 March 2015]. Prime, R., n.d. Life Insurance for Smokers: A Special Report by Life insurance. [pdf] Available at: [Accessed 29 March 2015]. Which, 2015. How to Buy Life Insurance. [online] Available at: [Accessed 28 March 2015]. Read More