Assess your needs before buying long-term life cover

Planning for the death of a spouse, or your own death, is a difficult and somewhat morbid task. Some would say it doesn't bear thinking about but, on the contrary, life-cover planning is essential for your family's future well-being.

Without proper planning, the untimely death of a breadwinner can cause tremendous financial difficulty for his or her dependants. "A major source of income will cease but the household expenses will still have to be met," says Mr Roderic Mellotte, director, Coyle Hamilton Ltd.

The number and type of life products on offer can be overwhelming. This issue is made more difficult by the various terms used in the industry.

Recently, Mr M from Dublin asked Family Money to print a list of basic terms relating to life policies. With the assistance of Coyle Hamilton, the Irish Insurance Federation and Bank of Ireland's Lifetime Assurance we've compiled the following definitions.

Life assurance and insurance: Many people use the terms life assurance and life insurance interchangeably. However, life assurance is protection against something that will happen, such as death, while insurance protects against the possibility of an event, such as a fire in the home.

Term policies: The purpose of life assurance term policies is to provide a lump sum on death within an agreed term of years. This is the lowest cost method of providing life cover.

Level-term assurance: Assurers guarantee payments of a specified sum in the event of the death of the life assured within the selected term (e.g. 10, 20, 25 years) of the policy. If the assured survives the policy term, no payment is made.

Cover may be fixed or indexed at an annual rate, usually 5 per cent per year, with the monthly premium remaining level or increasing throughout the term. However, term assurance may be included in occupational pension schemes, so check with your employer before taking out a policy.

For example, term assurance may be suitable for a young 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.

Convertible term: Like level-term assurance, a convertible-term policy means the assurers guarantee payments of a specified sum in the event of the death of the life assured within the selected term of the policy.

The one difference is that it includes a conversion option which can be exercised at any time during the term of the policy. This allows the assured to alter the policy to an endowment or whole-of-life plan on a with- or without-profits basis. At the time of conversion the assured does not need to provide evidence of good health.

Cover may be fixed or indexed at an annual rate, usually 5 per cent per year, with the monthly premium remaining level or increasing throughout the term.

Since this assurance is less expensive than other types of cover, it may suit young people, single or married, who may later be able to afford to convert into more suitable but more expensive longer-term contracts.

Mortgage protection/decreasing term-life assurance: Mortgage protection policies are usually required by a mortgage lender when a home is being purchased. Mortgage protection is a life assurance policy where a lump-sum payment is guaranteed on the death of the policyholder. It may also be taken out jointly so payment occurs when the first partner dies.

As a borrower repays the capital sum under the mortgage monthly, the sum assured diminishes yearly until paid off at the end of the mortgage term. Fluctuations in mortgage rates may mean the sum assured may not always exactly meet the outstanding loan amount on death.

Whole-of-life policies: The purpose of whole-of-life assurance policies is to provide lifelong protection in the event of death.

Whole-of-life assurance: The insurance company guarantees to pay an agreed sum on the death of the person assured provided the premiums continue to be paid. The premium is guaranteed to stay the same for life except when you have chosen an indexation option on the policy. This type of policy is openended and does not have a fixed term. Therefore, the policy will pay on death irrespective of when it occurs.

For example, older couples who wish to provide a lump sum to pay the inheritance tax on their estate when they die may choose a whole-of-life assurance policy.

There are a variety of whole-of-life products available including unitised, minimum cost and with-profit policies. As always, independent advice is needed to select the most appropriate product for your needs.

Endowment assurance: Endowment policies usually combine an element of life assurance protection with a larger element of savings. The assured sum is payable either at the end of the term or beforehand if the person dies.

This policy type is often linked with a term-endowment mortgage. The idea is to invest an amount of money on a regular basis into an endowment policy on the basis that at the end of the specified term, the policyholder will receive back an amount which will reflect a good return on the premiums paid. The sum may then be used to pay off the mortgage in one lump sum at the end of the mortgage term.

This product may suit those further along in their careers who have more money to spend, desire a means of saving, and who want to use it to pay off some, or all, of their mortgage.

Various types of endowment assurance are available including unitised and with-profit policies. Ask an independent adviser which product suits your family's needs.

These are just a few of the terms and types of life cover available. Many life companies are committed to transparent practices and to providing consumers with explanations in straightforward language. Lifetime is one company planning to bring out a comprehensive, easy-to-read explanatory glossary of terms in the coming months.

Coyle Hamilton regularly produces product glossaries and newsletters which help to explain many of the products and terminology. It also produces regular surveys on life assurance.

Thinking about life cover: The first thing to do when thinking about life cover is to examine the cover you receive under your pension scheme.

In reviewing the overall life cover that would be required to protect a family, the cover that may be provided under employment schemes should be taken into account, says Mr Mellotte. Many companies have an employee "death-in-service" scheme with life cover benefits ranging from one to four times salary. In some cases this multiple is even higher, he said. This policy is usually paid out if an employee dies during his term of service with an employer. Once the amount of cover already in place is determined, the individual should think about purchasing additional protection depending on needs.

"Individuals who are in non-pensionable employment or self-employment may effect a term assurance under section 235A which qualifies for tax relief," says Mr Mellotte.

Buying life cover: Before contacting an independent broker, determine your needs over the long term and have a good basic understanding of the type of products on offer.

Unlike tied agents and agents, brokers usually offer products from more than five companies and should therefore offer independent advice.

A good broker will ask you to provide as many details as possible relating to your particular circumstances. Very often a detailed questionnaire is the first step in this process. The information collected is used to determine which products are suitable for your needs.

Once you begin discussing the product options, ask the broker the drawbacks of each particular policy. It is important not to make an immediate decision so, take the documentation away with you and study it. If you have any questions, call the broker and ask for a full explanation or simplified documentation. Do not buy anything you don't understand or that you feel doesn't fit your needs.

Before purchasing a policy, ask your independent insurance broker to fully explain his or her commissions and all other insurance company charges and how these impact on your future policy payout. This is particularly important if you are purchasing a savings or endowment policy.

Usually, an initial commission is charged and then a charge is incurred each year when the policy is renewed. Some commissions may not go above a maximum percentage over the term of the policy. Many brokers now operate on a fee basis and do not charge commission. Your life policy should be examined as part of your yearly financial review. Talk to your insurance broker about the policy before renewing it to determine that it will still properly meet your family's needs.