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Allowance is made for any withdrawals made during the life of a life insurance bond. The rule is that the taxable gain is the cash-in value plus any withdrawals made less the original investment.

The further tax complications that arise when investment income surcharge also applies are too formidable to be dealt with here, except to note that they sizeably increase the tax charge. The basic effect of the taxation of investment bonds is that the higher-rate taxpayer is heavily penalised on the final gain. It is possible to mitigate the tax liability by using a regular withdrawal system. It is also possible for some people to predict that they will have a lower income at some point in the future which will eliminate or drastically reduce their liability on encashment, but a measure of caution is necessary in planning any such investment. The basic-rate taxpayer, on the other hand, escapes lightly.

Another factor that makes bonds attractive is the availability of switching facilities. Most insurance companies have a “family” of bonds, usually having at least a property, an equity, a managed and a fixed-interest fund if not also a cash or gilt fund. Most companies will allow the investor to switch the value of his units from one fund to another for a fee of around 1 % of the value. The advantage is that this avoids any exposure to tax, as selling shares normally would, because the money is still invested within the same life insurance policy. (It must be noted that capital gains tax charges are built into unit prices, however.)

Thus the indivi­dual can invest in one fund and switch to another when it is felt appropriate to do so. This “do-it-yourself’ portfolio management has its possibilities for anyone with sufficient application and determination. For example, between 1972 and 1975 the investor with a range of property, equity, managed and cash funds to choose from could, by making four strategic switches, have achieved a final value at the end of the period 40% higher than that achieved by any individual fund.

In the late 1950s, therefore, a different method of allocating investment profits to policyholders was intro­duced. This was unit-linked insurance, which has grown rapidly and now accounts for about one-fifth of all new policies taken out each year.

Instead of pooling all policyholders’ money in a single fund, unit-linked insurance uses a simple device to identify the investment benefits individually due. The element of life insurance cover is completely separated from investment; a small proportion of each premium is used to purchase life cover and meet the company’s expenses and the rest invested in units in a fund managed by the company or by independent investment managers. Each unit represents an identical proportion of the assets held by that fund, whether these are shares, property, fixed-interest securities or a mixture of each. Valuations are made at regular intervals (daily, weekly or monthly) to ensure that the unit price accurately reflects the value of the assets. New units are allocated to policyholders on payment of their premiums at the ruling price, and on encashment the policyholder is entitled to the value of the units his premiums have purchased, subject to deductions or charges that apply on encashment. Should he die before maturity, his dependants will receive either the fixed sum assured or the value of the units, whichever is the greater.

The principle of dividing a fund into units had been practiced by unit trusts long before it was introduced into the life insurance policy. In fact, the first unit-linked polices com­bined life insurance with investment in the units of a unit trust rather than a life fund. Later, the dis­advantages of restricting investment to unit trust assets were recognised, and life companies started their own funds which could invest not only in shares but in property and fixed-interest securities as well, with no taxation disadvantages. Some companies have also introduced hybrid policies which provide life cover far higher than the basic minimum normal in unit-linked insurance, so that there are now a wide variety of policies to choose from.

It is worth explaining how premium rates are quoted. The normal practice is to quote an annual rate of premium for a given sum assured, and rates are normally compared in terms of the cost per the sum assured. In the case of contracts providing an annual benefit rather than a lump sum, rates are compared in terms of premium per £1,000 of annual benefit provided.

Because most statistics show that women live on average four years longer than men, most life insurance companies elude lower premium rates for women. The normal practice is to have only one set, or table, of life insurance premium rates those applicable to men and to quote the premium rate for a woman as that applicable to a man three or four years younger. Thus, a 30-year-old woman would normally be nicely placed at the premium rate applicable to a man of 26 or 7.

At the younger ages, the difference in rates produced by this method is not large, but from the age of 40 upwards it is the majority of life offices quote life insurance premium rates on the injuries if “age next birthday”, and this is the basis used for (lit’ rites quoted throughout this book. A few offices use an “age attained” basis, and if one is comparing premium then this is important as one would expect the “age birthday” rate for a man now aged 29, i.e. the rate for a 30-year-old, to be comparable with the rate for a man aged 29. Half- and quarter-years may be taken into consideration in quoting premiums.

Annual premium rate is calculated on the basis that the company receives the annual premium in advance, i.e. in the beginning of each policy year. Payment of life insurance premiums opted in monthly or quarterly intervals mean a loss of interest. Quarterly or monthly premium rates are therefore legally higher than annual rates; with most companies, payment involves an extra cost of 3-5%. Most life insurance companies now make a fixed annual charge policy, known as a policy fee.

This method can be used to determine how much life insurance you need. It is used in conjunction with a needs analysis approach or separately as a quick calculation, if you have just want do an income replacement approach on its own. Whether you are using this method strictly on its own or in conjunction with a needs analysis, once the amount of income that needs to be replaced is determined, a decision must be made as to whether the pool of capital to provide this income will be preserved or liquidated.

Capital Preservation

The capital used for income replacement is left intact and the beneficiaries live off the income it produces.

Pros:

• Optimally provide an income stream indefinitely as the principal remains intact.
• Simple to calculate.
• The longer the payout period, the better this method becomes

Cons:

• If the rate of return is lower than the assumed rate, the beneficiaries could run out of money prematurely. The interest rate chosen is up to you; however a conservative and realistic interest rate will have a greater chance of meeting your goal.
• The amount of money needed to fund income replacement is typically greater than that of other methods, as the beneficiaries live off income only rather than principal and income.

Capital Liquidation

The length of time of income needs to be replaced becomes a major factor in determining the capital needed for income replacement.

Pros:

• Typically requires less money than the capital preservation method as both principal and income are used.

Cons:

• The length of time that the proposed insured’s salary needs to be replaced is highly subjective.
• Requires all the factors mentioned on the worksheet and human value needs to be examined.
• The survivor can outlive the income stream.
• More complex to calculate.

 Capital preservation and capital liquidation can both help you out to know the extent of life insurance that you require. Whichever means you take out, you may be sure that life insurance will be there to provide its support.

Since now, our main study was on the personal use of life insurance for income replacement, estate liquidity, estate creation, special needs, and charitable giving. It has been noticed that such needs almost never come simultaneously. It’s easy to picture, for example, a couple having a high standard of living due to high paying jobs facing severe financial crisis if there were the death occurrence of one mate - but, at the same time, facing no specified problem regarding estate taxes, special needs, or motivation to beneath a wing to the local hospital.

Assuming no premature death and successful carrier, retirement will turn out to be a major goal. At some point, their assets will turn out to satisfy the need of having a wealthy lifestyle they’ve always dreamed of. The replacement of earned income is no more the prime concern, but estate preservation, liquidity, access to cash values, special needs, and charitable concerns may now, to one extent or another, become part of financial planning in their maturity. In such cases an endowment life insurance policy that pays a lump sum with profits at maturity may come in handy as a pension or to settle old debts at retirement.

The death benefit of a large term policy purchased to handle the contingency of premature death will now be needed for other long-term purposes, but the policy may become unaffordable (or unconvertible) to continue for any practical period. Needs changed should ideally be forecast - at least in concept - at the time of policy selection. It is important to budget and plan your premium payment carefully. Should you not be able to carry on with your premium payments for a number of months, your insurance company may cancel your life insurance policy.

There is no doubt that a life policy is an excellent way of replacing income upon death when your family will have to cope with transforming financial conditions.

Life Insurance should be high on peoples priority list if you have a spouse, children, mortgage or business. You can choose the amount you want to be insured for and the length of time depending on your individual needs. You can have a single policy or a joint policy. When an insurance policy is taken out for one person all the insurance is on a single life basis. For two people it can be a joint policy where it covers both lives and would normally pay out event of the life that dies first. If the policy was to cover your mortgage the amount insured needs to cover you’re the total amount of your mortgage, loss of income and any outstanding liabilities. There is no cash value to these protection plans and if the premium stops at any time the plan is cancelled.

Once you know the amount of cover you require the premium will depend on a number of factors, age, sex, medical history and whether you smoke or not, height and weight ratios, family history or hazardous pursuits. The insurance company may send you for a medical with your doctor. In some cases the premium will be increased depending on the above factors and in some circumstances cover may be refused.

There a numerous types of life insurance that is available. The three main ones are level cover, this is where the amount of cover will stay the same throughout the length of the cover.

The next part is called increasing cover, this means the cover will increase in each anniversary of the contract. This will go up with the Retail Price Index (RPI). It is worth considering with this type of contract that the premium will go up every year. You will normally be told with plenty of time to spare what the new premiums will be.

The final and most popular part is decreasing cover. This is where the cover is calculated to match the maximum amount outstanding on a loan. The cover will come down and the payments will remain the same throughout the length of the cover.

It is important that you chose the correct policy that suits your needs from the outset as life insurance is very price sensative. If you get it incorrect and then decide to change your mind the policy will be a lot more expensive second time round.