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These are now one of the most common types of regular premium whole life insurance policies. These policies offer a flexible mix between life cover and unit investment.
The policy holder pays a regular premium and the initial level of cover is based on an assumed growth rate for the units in the fund to which the policy is linked. This assumed rate applies for the first ten years of the policy. At the end of the ten year period the units are valued to see if they have achieved the assumed growth rate, exceeded the assumed growth rate or fallen short of that growth rate. This determines whether the value of the units allocated will be enough to maintain the sum insured.
The action taken following this review will be to adjust the sum insured or increase the regular premium. Further regular reviews are then made either every ten years or five years or even yearly. Shorter review periods are used as the life insurance reaches a higher age level.
In the early years the life cover under these plans is higher and the amount of regular premium allocated to unit purchase is low. Life cover requirement is reduced as more units are purchased and the unit value increases. If the policy is surrendered then the surrender value is the bid offer price of the units purchased to date, which in the first two years may be zero. If the total unit value overtakes the sum insured then this higher value is paid out in the event of death.
To begin with the level of life cover was fixed to the level of premium payment. Now most life offices allow the policy holder the select the amount of life cover they want and to have the option of varying this level of cover (within certain limits) during the term of the policy. Obviously the higher the life cover amount the greater the amount of premium goes towards life cover purchase and the less towards unit purchase. This provides policy holders with the flexibility to have a higher life insurance cover when their family is young and needs the protection and then to adjust this and move towards a greater amount of investment as they grow older and their family matures.
A ‘maximum cover’ whole life insurance policy has a high level of life cover and a lower level of investment. The premium is therefore mainly risk premium. Because very little is allocated to unit purchase, under these versions of the policy there is a higher likelihood that premiums will need to increase when reviews occur.
In order to maintain the qualifying status of the life insurance policy for tax reasons the minimum life sum insured is set no lower than the Inland Revenue minimum. Some life insurance offices may themselves introduce a higher limit. The maximum amount of life cover also varies between life offices but is typically the amount that can be sustained throughout life based on a fund growth rate of 6%.
Increases in the life sum insured may be subject to medicals unless the policy has a guaranteed insurability provision.
The cost of the life insurance cover is met by monthly cancellation of the units and the amount cancelled is based on the difference between the sum insured and the value of the units allocated to the policy at that specific time. The life insured can therefore benefit from future improvement in mortality tables. As units and unit value increases the amount of life cover to be purchased reduces until a point is reached where the unit value exceeds the life insurance sum insured.
A number of life offices will allow the policyholder to increase the life sum insured in line with inflation without the need for medicals. This type of insurability provision is valuable because it allows the policyholder to maintain the real value of the life sum insured, which would otherwise be eroded by inflation. Some offices cancel this option if it is not used every time it is available. These options often cease after the life insurance reaches the age of 65.
These policies are usually available on single life, joint life first death or joint life second death basis. The contacts are used mainly for family protection and inheritance tax funding.
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Endowment Life Insurance Policies