The Basic Principles

Though the average life expectancy for a man is 69.2 years and for a woman 75.6 years, the individual's chances of getting there depend on a host of factors, including heredity (natural longevity or predisposition to certain types of illness), habits (smoking and drinking), activities (sports, travel) and occupation (risky ones such as motor racing cannot improve your chances), to name only the most obvious. The fact is that to plan (or rather not to plan) on the basis of a future life free of accident or illness is to take a measurable, and possibly substantial, risk.

Fortunately, for most people that risk can be covered at modest cost through one of the "pure protection" policies described in Section 3. In the past such policies have not been as widely advocated by advisers in the UK as they have been in other countries, for two main reasons. The first is pragmatic: brokers and agents have received very small commissions for selling such policies compared with what they have received on the more costly investment-oriented policies. But of equal importance has been the reluctance of people to put money into life insurance which operates on the same principle as insurance against a car crash or a fire. In the same way that your house insurance pays out only if you suffer a fire or other damage, the pure protection policy provides no benefits unless "the life assured" - the person whose life is covered by the policy dies (or, in the case of permanent health insurance, becomes ill or unable to work).

When faced with this type of insurance proposition which may require you to pay, say, £1500 over a period of 15 years but will return not a penny if you survive, there is a quite natural inclination to say "It can't happen to me.

Many people who have bought life insurance have as a result instead purchased policies oriented towards the production of a capital sum over a short period of 10 or 15 years - policies which to produce the large sums they promise must involve the investment of the bulk of the premiums in assets such as shares and property, and which therefore provide very little life insurance cover in relation to the amount of premiums paid.

Though this point will be more fully covered later, it is worth noting here that to provide £500,000 for his dependants if he should die within the next 20 years a 30-year-old man would have to pay only about £120 a year provided he accepts no return at the end of the period. If he requires the payment of the £500,000 at the end of the period, he may have to pay over £1300 a year. That is the difference between pure protective life insurance (no death, no money) and investment-oriented life insurance.


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Return at Maturity

As emphasised earlier, the choice of company for a with-profit policy is a good deal more important than in the case of pure term or FIB policies. Historical results show that, over a 25-year term, maturity values of with-profit policies have varied by as much as 36%. A managed 39 in 1992 paying £1110 a month over 25 years could have received as much as £17,300 or as little as £14,800 in 2013 at maturity of a 25-year with-profit endowment.

Many people are puzzled and even dismayed by this sort of disparity. It arises as a result of two main factors, both of which are... see: Return at Maturity


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