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A Guide to Life Assurance (Death Benefit)
As the name suggests, death benefit is
designed to pay out a lump sum of money on the death of the policyholder. There
are several different types of life assurance available, each of which is
designed to achieve a specific goal. This guide provides an introduction to each
type of cover available to expatriates.
Term Assurance
Term assurance is the simplest form of policy, offering basic cover for a set
number of years, usually at low cost. A term policy requires a regular premium
payment and pays out a lump sum on the policyholder's death. If the policy
expires and the holder is still alive, no payment is made; the policy pays out
only if you expire before it does.
The cost of the assurance premiums will vary from person to person depending on
factors such as age, health and occupation, but for all policies it is crucial
to ensure you keep up the monthly premium payments to keep cover in place.
Term assurance policies may also offer the option to pay an extra premium and
receive a payout in the event the policyholder is diagnosed with a critical or
terminal illness. There are three types of term assurance available to
expatriates:
Level Term Assurance
pays a lump sum if the holder dies during the term of the policy. Both the
premium and sum assured are guaranteed and remain the same throughout the
policy; you only need to choose how much you wish the amount to be, and the
length of the policy term. There is no payout, however, should the policyholder
outlive the term of the policy.
Annually Renewable Term
Assurance works in exactly the
same way as level term assurance but the premium us re-calculated each year
based on your age. Whilst this type of term assurance is cheaper in the early
years, the premium rises rapidly and will normally work out more expensive than
regular term assurance over the medium- to long-term.
Decreasing Term Assurance
sees the amount to be paid out decreasing over the term of the policy. Most
often used to cover mortgages, this type of term life assurance has the payout
sum reducing over time just as the amount owing on the mortgage reduces.
Some mortgage providers will not release mortgage funds without the debtor
securing some form of life assurance, guaranteeing repayment should the worst
happen.
Whole-of-Life Assurance
Whole-of-life assurance removes some of the guesswork from life assurance by
guaranteeing a payout of a lump sum when the policyholder dies, at whatever time
that may be. As long as the premiums are maintained, the cover is assured.
However, because a payout is virtually guaranteed, this assurance is generally
more expensive than basic term assurance and is generally more likely to be used
in estate planning as a tool to meet inheritance tax liabilities.
Offshore Savings Plans
For those looking to repay their
interest-only mortgage and protect their families against the mortgage debt,
most offshore savings plans can
have life assurance attached.
Having an interest only mortgage combined with an offshore savings plan is
usually substantially cheaper than taking out a repayment mortgage with separate
life assurance. However, as mortgage endowment holders will tell you, a
realistic (if not pessimistic) growth rate should be used to avoid a savings
shortfall when your mortgage is due to be repaid.
The idea is that the offshore savings plan repays the mortgage whatever the outcome;
if the policyholder does not die, the accumulated return at the end of the
policy term can be used to pay off the mortgage. If the policyholder dies before
the end of term, the mortgage is repaid from the life assurance element and the
family receive the cash value of the savings plan.
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life assurance
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