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www.InvestmentGuide.co.uk Other forms of investment type Life Insurance
LIFE INSURANCE
A commitment to save a fixed amount, usually monthly or
yearly, for a fixed term chosen by you at the outset of 10 to 25 years or more.
In return a life (usually your own) is insured for a fixed amount to which
profits called reversionary bonuses are added. The rate of bonus can
rise and fall but once a bonus has been added to a policy, it is guaranteed.
The fixed sum insured plus bonuses, plus with most companies a discretionary
terminal bonus are paid when the term ends or on earlier death. With
unitised contracts which are offered by many companies, the bonus is
added to the unit price instead of ths sum insured.
New
endowment mortgages are not recommended. But if you
are well into one, neither should you cash the policy. Some life companies have
asked savers to raise the amount they pay each month towards their endowment
policy. If you are in that position, you would do better to instead raise the
payments on your mortgage to your bank or building society by the extra amount
the life company has asked you to pay to them. By doing so you will have
converted your mortgage to a part-repayment mortgage.
Policies issued
on or before 13 March 1984 normally get tax relief (at a reduced rate). Keep
them going. You can buy second-hand endowment policies see
Life Insurance Traded Endowment Policy which could be
of interest to older people or if you suffer from a chronic illness.
Who can invest Anyone in good health. Better value the younger you are. The insured can be yourself or anyone in whom you have an insurable interest (e.g. husband or wife). Joint policies available.
How worthwhile Poor to good value for taxpayers depending on the company chosen for savings kept going for 10 years or more. Poor value if you give up saving before you complete the term. Compare with Life Insurance With Profits Flexible. For lump sums consider Life Insurance Traded Endowment or Life Insurance With Profits Bond
Minimum £10 to £50 a month.
Maximum None.
Suitable Regular savings.
Money back On maturity or death. You can stop saving at any time and take your money, the surrender value; or leave it paid-up in the policy. In the first few years you can lose most if not all your savings; even well into the policy there can be a heavy deduction with some companies.
Interest Variable. Based on bonus rate at the discretion of the life company.
Interest paid When policy matures or the person insured dies.
Tax The insurance company pays tax on the income and capital gains it makes which reflects in your bonus rate. There is no tax on the proceeds but there can be extra tax for higher rate taxpayers, currently 18%, if you cash a policy before 10 years or if it is a non-qualifying one.
Fees to pay Premiums usually include a policy fee (e.g. £3 a month) which make a £100 a month policy better value than a £25 a month one.
Passbook None. Insurance policy.
Children Policies can be in trust for children to avoid probate and inheritance tax.
Risk The terminal bonus may account for up to 65% of the proceeds of a 25 year policy which makes with-profits a potentially risky investment as a terminal bonus can disappear overnight if the company decides to reduce or remove it. UK authorised insurance companies are covered by a 90% compensation scheme less 'excessive' benefits.
How to invest Ask an independent financial adviser to find the best company for your age and term based on past performance for the term you want to invest and the company's financial strength. However past performance isn't much good: for instance according to Money Managment (April 2002) for a 25 year policy ending in 2002, only two of the nine companies which were best for a 25 year policy ending in 1977, were among the best in 2002. For a 10 year term policy, only one of the 10 companies which were best for a 10 year policy ending in 1992, was among the best for a 10 year policy ending in 2002.
Where from Money Management magazine publishes a survey yearly in its April issue, showing the best past performers over the past 10, 15, 20 and 25 years. In its October issue it publishes a survey on the Financial Strength of life companies which is also relevent although difficult to interpret. Life & Pensions Money£acts carries a survey each month of with profits companies. The top companies vary greatly from one survey to the next.
Other forms of investment
type Life Insurance
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Last updated 22 November 2002