Description

• This is a type of life assurance giving cover over the whole of a person's life. It carries the option of different levels of cover and as a result premiums can be flexible and altered to suit circumstances.
• The minimum level of cover will require a smaller percentage of the premium to provide the life cover, leaving a larger amount in the fund to grow. The maximum cover will use a lot more of the premium to provide the cover leaving less invested in the fund. Standard cover is between minimum and maximum cover. Ideally if standard is chosen the cover should be maintained indefinitely with no increase in premiums required, assuming the investments chosen grow at the necessary level..
• Encashing units from the fund provides the life assurance cover. All of these options rely on fund growth to provide a large enough fund to pay for the level of cover required.

Examples of Use

Individuals wanting flexibility to enable them to vary the life assurance and savings element as their circumstances dictate e.g. a young married man may require £50,000 cover and have higher levels of available income. If he then has children and requires more cover or a lower premium, he can alter the plan accordingly.

Advantages

• It can be linked to one or more funds.
• Future benefits other than death benefits may be available. 
• The policyholder can obtain high levels of cover at very low cost.
• If offers the highest level of flexibility with a number of options for potential future changes in a person’s circumstances.
• It can be written on a joint life basis on either a first death basis where a cash sum is paid when the first assured dies or on a second death basis where a cash sum is paid on the death of the survivor.

 Disadvantages

• Medical evidence is required.
• Any surrender value in the early years may be less than the premiums paid.
• If life cover has been selected on a maximum cover basis and the investment performance has not been high enough it may be necessary to increase the premium for the following period or to accept a lower level of cover for the same review period.
• This may also apply to the standard cover basis.
• The value of the units in the fund can fall as well as rise; thus the surrender value on the policy will also fluctuate.

Points of Interest

• If maximum cover basis in selected, then at each review, significant premium increases are likely.
• Critical illness cover can be included in many plans
• A number of providers have designed their plans on what is known as a ‘non-qualifying’ basis. If being used for IHT planning, it is possibly advantageous from an income tax planning point of view to ensure that the provider has a ‘check facility’ to ensure the surrender value of the policy never exceeds the premiums paid.
• Standard cover basis will reduce the possibility of significant premium increases in the future as opposed to setting the plan up on a maximum cover basis.
• Remember the higher the growth assumptions used, the higher the risk of premium increases in the future.
• It may be beneficial to pay a higher premium now, than a significantly higher premium in the future.