The cover story that just grew and grew

IT SEEMS a long time ago but life assurance was originally pure risk insurance - providing a cash lump sum on the death of the named life assured if this happened within a specified period. Nowadays, it has evolved into a more sophisticated product with many variations that can cover virtually any benefit need.

Term assurance is the simplest to understand. It covers the named life for a set number of years; the sum assured being paid if death occurs within the period, or term.

The cheapest form of life assurance, the downside is that it has no surrender value at any time.

Over the past five years premiums for term assurance have fallen by up to 40% and are now at a 14-year low. In the Eighties, providers overreacted to the fear of Aids and pushed premiums sky-high. But it turns out that Aids is less of a contagion than they feared and, together with longer life expectancies, this has led to fierce competition among the life offices for business, thereby reducing costs.

"Anyone who has taken out a term policy since the mid-Eighties should seriously consider reviewing it," says Don Clark, managing director of adviser Torquil Clark.

"Significant reductions in premiums may be made just by spending a couple of minutes on the phone."

Pure life assurance is usually bought on price alone and it is relatively easy to obtain best buy tables.

Whole of life assurance pays out on death whenever it occurs.

Unlike term assurance it builds up a cash value over time.

Because of this the cost is higher.

But it is suitable for anyone who wants to provide a capital sum for their heirs on death and for inheritance tax planning. Basically, it lasts as long as you do.

Critical illness cover provides additional security by giving the policyholder a lump sum payment should he or she be diagnosed with any one of a predefined list of illnesses, including cancer and heart disease. In fact, you are four times more likely to get a serious illness such as one of these than die before age 65. Yet few people take up this sort of cover, as it can seem expensive. This is the one of the areas where product packaging - term assurance plus critical illness cover - is valid as it substantially reduces the cost of the critical illness content.

Gordon Maw of Virgin says: "If you were to die suddenly or be struck by a life-changing illness and left unable to work, you or your dependants would usually need a substantial payout to pay off the mortgage, for example.

Combined life and critical illness cover is an insurance risk product which is priced to pay out on the first event, be it illness or death.

Therefore you are not paying separately the two types of cover."

Income protection policies are different. They provide a regular income if you are unable to work due to an accident or illness. The self-employed are often advised to take out this cover. Cost depends on age, job, sex and how long you are prepared to wait before payments start.

Where do you begin when it comes to life assurance? First rule is that a mortgage should always be protected, normally by a term assurance policy.

Typically, a mortgage absorbs 25% of after-tax earnings. The survivor could therefore maintain living standards with some 75% of the previous level of net income.

Nigel Webb of Equitable Life says: "If employed, see if your company offers anything. It may offer up to four times your salary and a widow's or widower's pension. Any insurance must cover contingencies, outstanding loans and be able to produce ongoing living expenses."

Peter Kelly of Allied Dunbar takes a more robust view. He says: "A reasonable after-tax rate of investment income is 5%. A survivor requiring 10,000 of income would need 200,000 of capital to invest on the death of the breadwinner.

Our rule of thumb is that, depending on personal circumstances, life cover should be set at between 14 to 20 times the income the survivor will require."

Personal circumstances often point to the need for life cover for a housewife. Mark Edwards of Royal & SunAlliance says: "Recent research has put the cost of replacing the average housewife at 20,000 per annum."

Policies can be written on a single or on joint-life basis "But couples should almost always insure separately," says Roddy Kohn of Kohn Cougar.

"Two people insured on a joint basis have only a marginally cheaper premium than two single lives. With two single lives if one partner dies, the survivor's policy will remain in force. Thus, for a modest extra premium, there are significant extra benefits."

Additionally, with the current high divorce rate, it makes sense to set up endurable life assurance provision through single life policies.

A life assurance policy is a valuable part of any individual's assets and should usually automatically be written into trust.

It makes sense to preserve the value of the policy for the beneficiaries and writing the policy under trust can help provide substantial savings in inheritance tax. In addition there is no delay in payout, the life office handing out the cash within days, whereas probate, the proving of the will, can take years. Says Peter Kelly: "It's an old clich but a trust will deliver the right money, into the right hands, at the right time."

Most companies will provide standard documentation although clients should check with their solicitors the precise effect of the standard wordings provided.

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