A-Z of Personal Financial Protection
Amount paid by a financial institution such as an insurance company or investment house to an intermediary such as an IFA for business placed. Following the implementation of the Retail Distribution Review on 1st January 2013, commission is no longer permitted on new transactions, to be replaced with fees, either charged explicitly or implicitly ‘facilitated’ within any investment. However, protection business is currently exempt from this and commission remunerated advice can still be provided.
Convertible Term Insurance
A term insurance policy that, at any time during the plan term and without further medical underwriting, can be converted to a Whole of Life policy or in some cases and endowment plan.
Critical Illness Benefit
Designed to primarily pay a lump sum in the event of an individual contracting any one of a whole range of critical illnesses such as cancer, heart attack, stroke, paralysis, blindness, and brain tumour. A good, ‘standard’ policy will cover typically 30 to 40 serious illnesses. However, recent innovations have seen the launch of new products and given rise to a totally new ‘severity’ based approach to critical illness, with coverage of over 170 critical conditions.
Death in Service (DIS)
Life cover provided by an employer usually expressed as a multiple of salary. This is usually provided via an insured Group Life arrangement, but can be provided on an individual basis via Relevant Life Policies.
Decreasing Term Insurance
This is an insurance plan that pays out a lump sum if you die or suffer a critical illness within a specified plan term. Unlike a Mortgage Protection policy, the amount of benefit payable reduces in equal instalments throughout the policy term.
Duty of Client Disclosure
Non-disclosure of all material facts is one of the key reasons for insurers not to pay out upon a claim. It is, therefore, of the utmost importance that when completing insurance applications care is taken to ensure you answers are complete and factually correct.
Employee Benefits / Flexible Benefits
These are benefits provided by an employer for employees and usually paid for by the employer. These can include pension, sick pay entitlement, death in service, critical illness and private medical insurance. These may be offered as part of a standard package of benefits, although larger employers often provide a flexible choice of benefits so that they may pick and choose those that are specific to their needs and requirements. For example, a single person with no financial dependants may choose no death in service cover and instead enhance their personal sick pay benefits.
An endowment is a part investment / part life cover policy which for a regular contribution over a specified term will pay a capital sum either when the policy matures or if you die prior to that date. Although the amount payable at maturity may or may not be guaranteed, depending upon the nature of the endowment plan, the amount payable on death is usually guaranteed to be not less than a stated minimum sum. It can be used both as a way of saving and providing life insurance. Apart from any guarantees that may be given any estimates of possible sums payable at maturity, or on earlier death, are not guaranteed.
A variation of endowment plan known as a Minimum Cost Endowment or Low Cost Endowment is most often found as part of an interest only mortgage repayment strategy. Most older policies are often With Profit based although some are investment linked.
Family Income Benefit Policy
A type of term insurance that provides life cover and / or critical illness benefit in the form of an income rather than a lump sum. This will be payable from the point of claim for the remainder of the policy term. The benefit can be indexed to ensure the benefit keeps pace with inflation. Due to the fact that the total prospective payout reduces each month, it is a very cost-effective means of providing cover. It is also a very apt way of protecting private school fee planning and maintenance as a result of a divorce.
Gift Inter Vivos Term Insurance
This is a decreasing term insurance with a term of 7 years where the sum insured remains level for the first 3 years and then reduces in equal instalments to zero over the remaining 4 years of the plan. This is usually affected as part of Inheritance Tax (IHT) planning to provide for IHT on Potentially Exempt Transfers (PETs).
Also known as Permanent Health Insurance (PHI). In the event that an individual is unable to work due to an accident or serious illness, this will provide a monthly income after a predetermined ‘deferred period’. The benefit will continue to be paid until the end of the agreed term of the policy or until the claimant returns to work if earlier. The maximum benefit is typically 50% to 60% of earned income and from a personally owned policy is payable tax-free.
Indexed Term Insurance
Similar to Level Term Insurance in that the plan benefit is payable as a lump sum, however, this does not remain level but rather the sum insured increases each year either by Retail Price Index (RPI), National Average Earnings Index (NAEI) or on a fixed percentage basis. This helps to offset the effects of inflation and maintains the real value of the benefit.
Level Term Insurance
Is generally a life insurance plan that pays out a fixed, level lump sum upon death or diagnosis of a critical illness during the specified policy term.
A benefit which becomes payable upon the death of an individual which can be effected in isolation or in combination with critical illness cover.
This can considered for any number of reasons including mortgages and / or family protection.
It may be structured as a lump sum or annual income. Please see the various structures of term insurance for specific information. For additional tax effectiveness may be written in trust.
Mortgage Protection Insurance
Unlike a decreasing term insurance where the benefit reduces in equal instalments, this is a term insurance where the plan benefit reduces in keeping with the reductions of a capital & interest mortgage, with small reductions in the earlier years with ever greater reductions each year throughout the term. It can also be suitable means of protection alongside an appropriate investment vehicle in an interest only mortgage.
Permanent Health Insurance (PHI)
See “Group Income Protection” and “Income Protection”
These are any physical or mental conditions that exist prior to the effective date of an insurance policy.
Private Medical Insurance (PMI)
This is an insurance policy that pays towards private medical treatment where the condition is covered by the policy.
Relevant Life Policy
A tax efficient policy allowing an employer to provide Death In Service cover for an individual, usually a key employee.
Renewable Term Insurance
A term insurance policy that at the end of the plan term, can be renewed without further medical underwriting, albeit that the cost will be calculated based upon the age of the individual at that time.
Term insurance is a plan that pays out a benefit if the insured dies or suffers a critical illness within the plan term. These are generally pure risk policies, with no surrender value or maturity value accumulating within the plan. If no death or critical illness, depending upon the cover selected, occurs during the term, then the policy will end and no money will be returned. Equally should premiums cease under the arrangement at any time, cover will lapse without value. As noted above, term insurance comes in many different forms.
The primary advantage of writing an insurance policy under trust is that in the event of death the plan proceeds are payable without the need to obtain probate. This is a legal administrative process, which can sometimes be a long drawn out affair and one that may otherwise delay the payment of the benefit. The proceeds will be payable to the nominated beneficiary or beneficiaries regardless of whether a will has been drawn up or not. Policy proceeds paid out under trust are also outside of an individual’s estate with regard to Inheritance Tax (IHT).
This is the legal document that establishes and governs the operation of a Trust.
An individual or corporation appointed to administer the terms of a Trust document.
Whole of Life Assurance
This is an open ended policy structure. The benefit is paid out whenever this occurs, as unlike term insurance there is no expiry date. Premiums may be payable throughout life, or for a shorter period. ‘Traditional’ Whole of Life plans were With Profit based.
However more modern investment linked versions replaced these. These are known as Flexible Whole of Life and, as the name suggests, premium levels are flexible. Cover can be costed for on a ‘maximum’ basis where cover is maintained for a period of typically 10 years at a time or 5 years for older clients. Alternatively they can be effected on a ‘balanced’ basis where premiums are set at a level to maintain the cover for the duration, subject to an agreed rate of investment return being achieved.
A subsequent evolving of this market has lead to the introduction of guaranteed premium products, removing the link to investment returns altogether, although these are generally more expensive.