Life Insurance Reviews

Given the investment advantage of the personal pension plan, it is odd at first sight that many self-employed people continue to purchase endowment policies. Other than the lack of knowledge of the benefits of such a plan there is one possible reason for this, which is that pension plans cannot be used as security for loans. The benefits under a personal pension plan cannot be assigned to any other person; once the contributions have been paid, moreover, even the life insurance plan ­holder may have no access to them until retirement. Thus, although it is possible to stop paying premiums and to receive a reduced pension at retirement, it is not possible to surrender the policy. In most cases this factor will not weigh heavily against the benefits of the pension plan, but it should always be borne in mind.

A normal life insurance policy involves the payment of regular premiums by the policyholder in return for a final cash benefit on maturity or death. The annuity simply reverses this situation, in that the life insurance company guarantees, in return for a lump-sum payment, to pay a regular income to the annuitant until his or her death. On taking out an annuity, the annuitant therefore loses control of the capital invested.

The principle of annuities is simple enough, and even the British Government issued them until as recently as 1962. From the mortality tables the company’s actuary knows the average proportion of people of a given age who will die each year, and from this, together with the rate of interest obtainable on investments, the annual sum that can be paid to each annuitant can be worked out. Some annuitants will die early, soon after paying their lump sum, and the office will make a “profit”; some will live for more or less the average period the actuary has estimated and receive all the capital back that they originally paid over (plus interest); while others still will live to a very ripe old age and the office will make a “loss”.

It is true that the more risky policy of limiting one’s investment to a “specialist” fund (for example, one investing only in Far Eastern stock markets or only in gold-mining shares) can also produce higher profits just because of the greater volatility of these sectors of the overall investment market. So the problem of selection finally comes down to the question of how much risk the individual is prepared to take.

Normally, the answer is determined by two factors (apart from the temperament of the individual) - the resources available and the time period involved. If you have only a small amount of money to devote to saving, then you should be wary of putting it into the higher-risk alternatives. If you have more, then you can afford to split your saving between the plan involving lower risk and another involving higher.

In general, therefore, the type of fund best suited for those with limited resources and no wish to take unnecessary risks is the managed fund. Here, the managers will aim to adjust the proportions of the fund invested in the three main sectors (property, shares, fixed-interest securities) to minimise losses in falling markets and maximise gains in rising ones. Over any short period, through this spreading of assets, they are likely to do less well than at least one of the three sectors might do individually, but over a longer period this should be outweighed by the ability to mitigate the poor performance of one of the individual sectors over other periods.

For those interested in being more venturesome, the next best choice is an equity fund or unit trust with a broad spread of holdings in UK companies. A point worth noting is that funds aiming to produce high capital growth normally invest in low-yielding shares and therefore generate a low annual income (this applies especially to unit trusts investing in overseas stock markets). Over the long period of a life insurance policy (minimum l0 years) the reinvestment of income can account for a large proportion of growth.

The actual form of the life insurance policy has not changed a great deal over the years. The policy is a contract between the policyholder and the company, made on the basis of the proposal form in which the prospective policyholder has to give such information as the company may require (accuracy is essential here if the contract is to be valid). In return for the payment of the specified premiums, the company guarantees to pay the sum assured plus, was relevant, bonuses, to the policyholder at the specified maturity date or on the policyholder’s earlier death.

The difference between life insurance and general (motor, household and other risks) insurance is that, having made the contract, having made the contract, the company is bounded by it and cannot refuse to accept future premiums if, say, the policyholder’s  health deteriorates. Life insurance is a long term contract, whereas general insurance is renewable at the option of both parties and the premium rate may be adjusted as the insurer thinks fit.

There are some legal limits on the faculty to be insured. One may insure the life of another person only if he has a financial interest in that person death or survival. This condition used to be applied very strictly, to the extent that a man might not, for example, insure the life of his father. However, this rule is now more liberally interpreted and some offices would allow a man to insure the life of his father to provide for the CCT that would become payable on his father’s death.

Unless some similar financial interest is established, a parent may not insure the life of a child (except under certain industrial assurance policies to provide for funeral expenses), but a lender may insure the life of his debtor, since he stands to suffer a loss if the debtor dies before repaying the loan. One relatively modern innovation in life insurance is the appearance of policies designed with women. The bulk of traditional life insurance policies were designed with the male breadwinner in mind.