Frequently asked questions
Have Life Policy premiums been getting cheaper?
Yes, the trend has been for lower premiums, for quite a number of years, for
term assurance in particular.
There are several reasons for this, better life expectancy in general, following advances in medical science, better housing conditions, less hazardous working conditions, more efficiency in the handling of processing and premium collection by the insurance companies, and competition, which has been quite beneficial for the insuring public.
All of this means it is a very good time to get quotes for replacing policies
you have had for a few years.
What is Insurable Interest?
When life assurance policies first became available, the unscrupulous thought
they would be a good gambling opportunity, and they would take out a policy
on the life of someone else, perhaps someone in a dangerous occupation, who
may be killed, or had a health problem.
This unfortunately ended in the demise of some of the lives assured being "helped along" a little. The principle of Insurable Interest was introduced, to regulate who could take out policies and on whom.
Everyone has an undisputed insurable interest in their own life, they will want to make provision for their family, etc, but it not so easy to establish insurable interest in the life of another. It is necessary to establish a potential financial loss which would occur to the policyholder if the life assured died.
This is quite easy to do in the case of a wife, insuring her husband's life, two joint mortgage holders having cover on each other, and the like. It has completely removed the danger of policies merely being taken out on relative strangers, purely on a speculative basis.
What is the policy Term?
The Term is the number of years the policy will run for, so a ten year Term
policy will provide cover for a period of ten years, then lapse with no value.
What are Material Facts?
When taking out an insurance policy, it is important not to try to conceal
anything which the underwriter may consider important to him or her in assessing
the risk. To conceal such information is called Non-Disclosure.
So, anything which would influence the underwriter in assessing the risk is a material fact. The most common material facts are medical history, including symptoms which have appeared but have not yet been investigated.
It should be clear from the application form what the underwriter considers to be a material fact, and what is a material fact is a matter of law, not just what you think you should disclose.
If you always answer the questions fully, exactly as they have been asked, you can't go far wrong.
What does an Underwriter do?
An Underwriter assesses the application for Assurance, or Insurance, and
decides whether to take on the risk, and whether he should apply any exclusions,
restrictions, or additional premiums.
These days, the underwriter will actually see very few of the applications. He will have prepared a set of criteria, which are usually written into a computer program, which either reads the forms directly, or a clerk will enter the information, or the applicant will input the information over the internet.
The assessment will depend on which questions have been answered yes or no, and if certain questions have been given certain answers, the application will receive individual attention, otherwise it will just be accepted and the policy issued.
What is a Loading?
Some applications are accepted at normal terms and rates of premium, usually
where there are no adverse medical disclosures, no hazardous activities,
or occupation, etc. This is sometimes know as a "clean case", or a "first
class acceptance".
Other policies will be subject to special terms or conditions. If this takes the form of an additional premium to reflect the extra risk, it known as a premium Loading. So, for example, if an extra 50% premium is to be charged, it is known as being "Loaded 50%", or a "50% Loading"
What is the difference between Guaranteed and Reviewable Rates?
When underwriters are setting the premium rates for their policies, they
often have two sets of rates. One is fixed for the term of the policy,
so, for example, if the premium quoted is a Guaranteed premium of £50 per
month on a policy with a term of 25 years, the premium will stay at £50
for the full 25 years. The underwriter is guaranteeing not to increase
it.
The second method is to set a premium rate based on today's life expectancy tables, etc, but with a condition that the underwriter will review his rates at intervals, usually of five years. So, for the same policy, the underwriter may quote a Reviewable premium of £40, which he will review five years into the policy.
At that time, he may decide to put the premium up to £43, then perhaps at the next review, he may decide not to increase it. The benefit of the Reviewable premium is that it usually starts off lower than a guaranteed premium. The danger is that it will increase substantially at some future date, to a level which the policyholder cannot afford.
The reviews are not based on the health of the life assured, that is not a factor, it is the underwrter's experience of paying out claims, and the industry's experience of life expectancy in general which will determine the trend. For example, medical advances are improving life expectancy over time generally, but some major epidemic of some fatal disease could come along and mess things up completely.
What is the Sum Assured?
The Sum Assured is the amount of money which will be paid out by the insurance
company on the death of the Life Assured. So, if the Sun Assured on the
policy is £100,000, then the amout paid out will be £100,000.
Do Term Policies have a Surrender Value?
No, term assurance provides one of the cheapest forms of life assurance cover,
and there is no investment element in the premium. So, there is nothing
paid out on survival of the life assured to the end of the policy term,
and nothing paid out if the policy is stopped before the end of the term.
Some Whole of Life policies and Endowment policies may acquire a surrender value, which means a payment of some sort would be paid out if the policy were lapsed before death, in the case of the endowment, or before the end of the policy term, for the endowment.
What is the difference between the Policyholder and the Life Assured?
The Policyholder is the person who takes out the policy and who pays the
premiums. The Life Assured is the person on whose life the policy is written,
that is, the person whose death will result in the policy paying out.
There can be more than one Policyholder, for example a couple taking out a mortgage protection policy, in which case there would probably be two lives assured as well, the same as the policyholders.
They need not be the same, though, a wife can take out a policy on the life of her husband, for example, so she would be the policyholder and he would be the life assured. This is sometimes known as a Life of Another policy.
Should I replace my old policy with a new one, if I can get
better premiums?
Usually yes, but with important warnings and conditions. Remember that the
new insurance company has to consider your application on the basis of your
state of health when you take out the new policy, so if there have been any
health issues, do take care. If you have to go for a medical, this may show
up some concerns, which may mean it will be better to keep your old policy.
Never cancel an old policy before getting acceptance for the new policy. If you are declined, or the terms are too steep, you can always continue the old policy, but if you have cancelled it, the old company may want to consider the current medical situation before reinstating it, so be careful, or you could be left without cover. Always wait for acceptance of the new policy, then when the new policy has started, then you can cancel the old one.
With lower, more competitive premiums, it is often possible to find cheaper terms, so do consider it, especially if your health is just as it was when you took out the old policy.
Should policies be written in trust?
Some policies should be written in trust, with others it is not necessary,
or desirable. When a policy is written in trust, the benefits are paid
out to your chosen trustees, rather than to your estate. It is the trustees'
responsibility to pay the money to your chosen beneficiaries.
An example will be useful. If someone has children by a previous relationship, they may want to ensure these children benefit from the proceeds of the policy, rather than, for example, the new partner's children. If the policy is written in trust, with the children who will benefit selected as the beneficiaries, this will ensure the right people get the money.
If the policy was not written in trust, the proceeds would form part of the person's estate, and the new husband, say, would benefit. On his death, the children of the previous relationship may not benefit at all, which is not what was intended.
Apart from ensuring the right people get the policy proceeds, trusts may be used in estate planning, incuding the provision of funds to pay Inheritance Tax (IHT) bills, without having to sell the family home.
There are disadvantages in using trusts, too, extra paperwork, delays in getting trustees signatures if you want to increase or alter the policy, the danger of trustees pre-deceasing you and new trustees having to be appointed, the responsibility which has to be assumed by the trustees to carry out your wishes, and the lack of confidentially, as you have to tell the trustees, what your policy is, how much it is for, etc.
Where appropriate, the advantages far outweigh these concerns, however. It is important to get it right, though, and we can assist with poviding the required trust documents, and guidance on whether a trust is advisable, the type of trust, etc.
Can I cancel a Life Policy?
Yes, you are not committed to paying any fixed number of premiums. You are
free to cancel a policy at any time. You should try not to, of course,
if you still need the cover, but if you can find cheaper cover, for example,
or you manage to pay off your mortgage early, etc, there is no reason to
keep paying the premiums if you n don't need the cover, although you can
if you wish, of course.
Just be sure that if you are replacing your policy with a new one, that you get accepted for the new policy before you cancel the old one, just to be sure.
What is a Convertible Policy
Term assurance policies were sometimes issued as Convertible Term Policies. These
could be very useful, as the premiums were kept to a minimum in the early years,
with just straight life cover being provided, but later, the policy could be
exchanged for a different tyor of policy, such as an Endowment policy, or a
Whole Life policy.
The best thing was that there were no medical considerations at the time of conversion, so, even if health had deteriorated, it was still possible to get continued cover in the form of a Whole of Life policy, when someone would certainly be declined for a new application.
There is no guarantee, however, that the insurance company will still be issuing policies of the type the old policy can be converted into, as has happened quite frequently in recent years, with insurance company takeovers and mergers.
What is the difference between Assurance and Insurance?
There are two reasons for calling some policies one and some the other, one
is legal, the other is cultural.
In the UK, a policy which covers the risk of something which may happen, is generally called insurance. So, you have a household contents Insurance policy in case your house goes on fire. It may never happen, of course, and both you and your insurance company hope it never does.
Assurance, on the other hand, provides cover against something with will certainly happen, but we just don't know when, the usual risk being that of death, so life policies are generally called Life Assurance policies.
The cultural difference is just based on where you live. If
you are in the UK, you will have a Life Assurance policy, in the US they
call it Life Insurance.
