Insurance Example 1

Mr Brown wants to provide financial security for his wife (who is not working) and his two young children. He wants the cover to continue until the children have become independent, so wants a policy to run for 15 years. The lump sum has to provide a reasonable income for them to supplement the modest State benefits (the widow's benefit plus child allowances) they would receive, and he reckons a sum of £120,000 would be needed. At his age of 33, this amount of cover over 15 years will cost £138 p.a. gross, reduced to £131.35 by tax relief at 17.6%.

The important factor in protection planning is the concentration on income requirements, not the apparently large capital sums provided by the policy. If money can be invested to yield, say, 10% before tax, then a sum of £120,000 will produce an annual income of £12,000, but this will be subject to income tax. If the dependants have no other income, the amount of tax paid will depend on the personal allowances they can claim; in Example 1 around £1300 of tax would be payable. This would leave a net income of approximately £134 a week - not an excessive figure given today's cost of living.

Clearly if the wife is also contributing to earnings this must be taken into account. Here each partner should ideally be insured for a sum sufficient to produce at least the equivalent of their net earnings, since apart from the regular outgoings that will need to be covered, there will also be extra costs of domestic help with young children. As we shall see, there are policies more suitable for this purpose than level term by itself.

Level term assurance may be useful in many other circumstances, however. Covering personal debts is one example. Today, many loan agreements such as personal loans and hire-purchase contracts contain automatic life insurance since the prospect of claiming a debt from a debtor's dependants is not relished even by the most stony-hearted moneylender. In some cases it may not be included, however, and it is always worth checking this when arranging such loans. Other loans raised for personal businesses are unlikely to be protected in this way, and here term assurance can be a very sensible precaution.


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Term Assurance

Approximate annual cost (gross) of £500,000 of term assurance for stated periods at ages shown.

Age (years) Term (years)

5 10 15

30 £1114.00 £1115.00 £1117.00

35 £1115.00 £120.00 £125.00

40 £125.00 £130.00 £140.00

45 £135.00 £150.00 £165.00

50 £160.00 £180.00 £11100.00

55 £11100.00 £11130.00 £11170.00

The rates shown are those applicable... see: Term Assurance


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