Term assurance

Term assurance pays a lump sum if death occurs before a date stated in the policy (say) before 20 years of the date of the policy. If death occurs after that date, then nothing is paid because the policy has expired. However, the as­sured has had the protection for that period. Mortgage protection policies are term life cover

Endowment assurance

Here the sum assured is payable at a certain date, e.g. 13 October 1998 or prior death.

Annuity

An annuity is the reverse of an assurance policy which pays a lump sum after a stream of annual or monthly premiums. With an annuity, the pur­chaser pays a lump sum now⁷, and receives a stream of income payments until his/her death. Joint annuities for husbands and wives or for partners can be bought but they are more expensive because payments will continue until the death of the second survivor. For people's peace of mind - 'what if I die the month after I bought the annuity?' - most annuities can be guaran­teed for five years, so that if early death occurs then payments will continue for five years after the date of purchase.

Prices of annuities - the yield per year per £1,000 spent - depend on the age of the purchaser and current levels of interest rates. The older the buyer and the higher the yields on fixed-interest rate securities, the more income each £1,000 will buy

Personal pensions

In 1988 great changes took place in their legal basis. Those pension con­tracts taken out before July of that year are termed 'retirement annuities' and many of these will continue until their owners purchase special kinds of annuities from which they will draw their pensions. This could continue until 2030 or later.

Personal pensions replaced the older products and began to be sold in 198S. They are particularly suitable for self-employed people and those workers with no occupational pensions. Most providers of personal pensions are life assur­ance companies rather than pension funds.

Additional voluntary contributions (AVCs)

These, before 1988, could be provided by pension funds for their members to 'top up' their pensions to the maximum possible level. Since 1988, new AVCs must be 'money purchase' schemes, usually provided by life assurance com­panies, rather than allowing members to buy extra years of service for their pension schemes provided by their employers.

Profits

Apart from term life assurance, holders of whole life, endowment policies and annuities can share in the profits of the company or organisation providing the cover. Traditionally, profits have been declared annually or every three or five years, and added to the sum assured in what are known as reversionary bonuses. These cannot be taken away, so that assurers adopt a very conserva­tive attitude when 'declaring' (announcing) them. A second type of bonus is paid on maturity - the terminal bonus - and this fluctuates in line with conditions in the stock and property markets. In the 1990s, many companies have been reducing their terminal bonuses, while others have even been un­able to declare reversionary bonuses at the level of previous years.

These uncertainties of the trend of profits have caused some companies to cease to sell 'with profits' endowment policies. Instead, they have begun to sell 'unit-linked' endowment policies, which are divided into units whose value fluctuates in line with market trends. In other words, their value can fall, unlike the traditional 'with profits' endowment or whole life policy.

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