Choose life assurance product that suits your needs and budget

Providing financial protection for your family in the event of your death is an essential part of estate planning. Life assurance policies are designed to meet this need by ensuring an element of protection, savings or both. There are four basic types of life assurance: term, whole of life, endowment and disability or illness insurance.

Beginners in the life assurance market may be interested in the most basic form of cover - term, or temporary assurance. At the outset, the customer decides the policy length and payout amount. For example, they may choose £100,000 over 10 years. If the individual dies during this period, the policy will pay the predetermined amount. If the customer survives beyond the policy period, the policy runs out and nothing is paid.

As there is no savings element, these policies are relatively inexpensive to purchase. The policy may suit a person on a medium to low income who wants to provide a suitable sum for their spouse, partner or other dependant in the event of death. These policies are most often used to protect a loan that must be paid on a set date, to boost overall life cover or to assure a key person in a business until they reach retirement age.

Premiums must be paid continuously otherwise the cover ceases. Monthly payments are higher depending on a person's age. Therefore, term assurance is more feasible for younger people. For example, a young couple with young children clearly need life cover.

"In the event of the death of one of the spouses, there will be expenses for rearing children. If there is not much money to spare but they want life cover, term is the cheapest," says the Irish Insurance Federation's life assurance manager, Ms Jennifer Hoban.

Term assurance may be included in occupational pension schemes so it is important to check with an employer before taking out a policy. A tax-saving section 784 term assurance policy is available to those earning income but not included in a company pension scheme. This provides full income tax relief on the policy premiums.

Assurers also offer convertible term assurance that allows policyholders to convert to another type of policy during the life of the policy for a small additional amount per month, depending on the person's age. This policy provides the same amount of cover but the policyholder does not need to demonstrate evidence of good health. This flexible policy particularly suits young people who may later be able to afford conversion into more suitable longer term contracts.

Another popular type of term policy is a mortgage protection policy. These are actually decreasing term policies where the amount on cover reduces each year in line with the amount of the mortgage, says Ms Hoban.

When taking out a basic level term policy, individuals are asked to designate a grantee, or the person who will receive the funds if the policyholder dies, says Mr Roddy Mellotte, director of Coyle Hamilton's Employee Benefits & Investments. In most cases, this is their spouse or partner. If the couple separate, or divorce, a problem arises as changing a grantee costs 1 per cent of the cover amount.

If a grantee is not specified, the proceeds will go to the person's estate. There may be a delay in the spouse or partner's receipt of funds depending on the administration of the estate.

People often don't realise that when they apply for life cover, they must give full details of their medical history, says Ms Hoban. When customers fill in application forms they are asked questions regarding their health and dangerous pursuits.

"There's a legal obligation on the individual to answer the questions fully and honestly. What can happen further down the road is that if there was nondisclosure of a medical condition, a person's policy could be found to be invalid," says Ms Hoban.

Prices vary greatly between assurers for the same level term cover and consumers are advised to shop around. (See accompanying chart).

"The basic thing is that not all companies are competing in every area," says Ms Hoban. "Term assurance is a long-term commitment so the company takes a view as to the level of mortality over that period and different companies have various views, levels of expenses and margins."

For more information on life insurance, Ark Life's new edition of Life Made Simple is available free of charge at AIB bank branches, or by calling: 1800 780 780.