Maximum Protection Policies

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Maximum Protection Policies

It is generally advised that you keep your protection and investment arrangements quite separate, independently choosing the best options to meet each need.

However, there is one type of investment-type life insurance that does need to be considered within the context of protection: flexible whole-of-life policies that give the option of choosing maximum protection.

These are unit-linked policies.

The premiums you pay go into an investment fund that is divided up into units. The value of your policy depends on how the price of these units moves and that, in turn, depends on the value of the underlying investments in the fund.

You decide how much life cover you want within limits.

Minimum cover

Most of your premiums remain in the investment fund and hopefully build up a good cash-in value to give you a return on your investment.

Alternatively, you might use the fund that has built up to pay for insurance later on: for example, to cover a potential inheritance tax bill.

Maximum cover

Your units in the investment are cashed in each month to pay for the life cover. At this highest level of cover, and assuming a given return on the investment fund, it is expected that cover can be maintained at the same premium for, say, five or ten years.

After that, it is likely that premiums would have to rise to maintain the same level of cover.

The policy is reviewed regularly, usually after the first ten years and after that every five years.

At the review, the balance of premiums, investment fund and cover are checked. If your current premiums and fund are insufficient to maintain the chosen level of cover, either the premiums must increase or you must reduce your cover.

A maximum protection policy can be cheaper than term insurance in the early years and is, therefore, an option to consider if you need a lot of cover now for the lowest possible premium.

However, you must bear in mind that, at the policy review, your premiums are likely to rise or the cover reduces.

Maximum payment policies: tip

If you are eligible for a personal pension or stakeholder pension scheme, you can get tax relief on what you pay for term insurance.

Which type of insurance?

There are two broad types of life insurance: protection-only and investment-type. If your main need is for protection, there are two schools of thought:

Protection-only insurance

The first recommends that you choose protection-only insurance, which is called 'term insurance'. In its simplest form, it pays out a specified amount if you die within a selected period of years. If you survive, it pays out nothing. It is the cheapest way overall of buying the cover you need. The numerous variations on this basic theme are described below.

Whole-of-life policy

The second school of thought recommends that you choose a whole-of-life policy that is one form of investment-type policy. As the name suggests, this provides cover for as long as you live. Since the policy must eventually pay out, it builds up an investment value that you can cash in by surrendering the policy.

But it takes many years for a surrender value to build up and, in general, whole-of-life policies are an expensive buy if your main need is protection.

However, a variation called a 'maximum protection policy' lets you buy a high level of cover at a premium that is initially very low. You should definitely avoid taking out an endowment policy if your primary need is protection.