Comparison Of Life Insurance Quotes

A point that must be noted is the effect of the final encashment of income bonds on age allowance. The age allowance is an extra personal allowance granted to those aged over 65. For the fiscal year 1978/79 a married couple (over 65) will be allowed personal allowances free of income tax of £2,075 (instead of the normal £1,535) provided that their taxable income does not exceed £4,000. (If it does, the extra allowance is reduced by £2 for every extra £3 of taxable income.)

The bulk of the income from guaranteed bonds is not taxable and therefore does not count towards the limit: thus if £10,000 is invested in a guaranteed income bond yielding 8% net, only the “excess” of 3%, i.e. £300 a year, is regarded as part of taxable income for age allowance income limit purposes. Income bonds are often, therefore, a more efficient source of income for the retired than, say, building societies, since in the latter case all the grossed-up equivalent of the net income is taken into account.

However, in the year of encashment of an income bond, there will be a gain (on the capital portion) which will be subject (normally) to higher rates of income tax and invest­ment income surcharge. For the purpose of these two taxes, the gain is “sliced” over the period for which the bond has been held, and normally this will mean that any tax payable is small except for very high rate taxpayers.

However, for the purposes of the age allowance income limit, no top slicing is allowed and the whole of the taxable gain is regarded as part of the income in that tax year. This will very often mean that age allowance is restricted in the year of encashment, which means the individual will pay more income tax. However, this tax liability in an encashment year should not be looked at in isolation but related to the tax savings in the previous years. Most investors will achieve an overall gain in net income from income bonds over the holding period.

The average acquisition cost of units is determined by market movements and a principle called pound-cost averaging applies. This means that, because a given premium buys more units when prices are low than when they are high, over a period the investor acquires more units at lower than at higher prices and therefore his average acquisition cost per unit will be below the average unit price over that period. Pound-cost averaging is simply a mathematical fact of life, and, though it is comforting to know that it is working on one’s behalf in any regular investment plan, it does not alter the fact that it is the difference between the average acquisition cost and the unit price on encashment that determines the profit one receives.

The final unit price is subject to the fluctuations of the market, and as we have seen in recent years these fluctua­tions can be large and sudden. For this reason the majority of unit-linked life insurance policies contain one of two options: either the investor may defer taking the policy proceeds for a year or more (i.e. the policy continues in force with no more premiums payable) or he may take the units his premiums have acquired instead of the cash value. Either way, the intention is to allow the investor to ride out any fall in market prices so that he may encash his units at a better price. The ability to defer taking the proceeds is the better option, since the sum paid out will still be the proceeds of a policy and thus free of tax, whereas if the investor takes the units as the policy proceeds then any increase in their value from that point on creates a gain liable to capital gains tax.

To return to the theme of investment management, it is today widely recognized that to better the average trend in prices in any investment sector by a consistent 1-2% p.a. is a considerable challenge for any fund manager. Of course, most funds do achieve short-term bursts of performance.

The disparity between the cost of protection and investment-oriented contracts mentioned will be reiterated. Since the vast proportion of the premiums on any participating, or even non-participating life insurance policy aimed at producing a capital sum will be devoted to investment rather than to providing life insurance coverage, the cost of a given sum assured for an endowment policy of a given term does not vary greatly according to age. For example, a with-profit life insurance endowment policy for a given sum assured over 15 years would cost the same at 30 as at 20, only 2 or 3% more at 40 and about 7% more at 50.

So long as you are in reasonable health, therefore, you will lose very little, in terms of premium rates, by delaying taking out an investment-oriented contract until you are older (though of course the longer the period of saving, the larger the return will be). However, if we look at protection by itself, the picture is completely different. A 45-year-old man will pay up to four times as much for a 10-year term assurance policy as a 30-year-old; and a man of 55 will pay up to three times what the 45-year-old pays. Another way of seeing the difference is to look at the relationship between whole life insurance premium rates (premiums are payable throughout life) and term assurance rates.

The 30-year-old man would pay about £90 a year for a £10,000 whole-life insurance policy. A 15-year term assurance with the same sum assured would cost him about £17 a year. For a man of 55, the cost of the whole-life insurance policy has more than trebled to just over £300. But the cost of the 15-year term assurance has multiplied tenfold to £170.

The conclusion, inevitably, is that pure protective life insurance is best bought young, when it is so cheap as to be insignificant (at least by comparison with what you have to pay later). The sharp rise in the mortality curve after 30 is reflected in a steep increase in insurance premium rates.