Pension term assurance, also known as pension term protection and pension life insurance, is a form of life insurance which pays a lump sum should you die before you reach retirement age. It is intended to replace the income you earn in order to allow your family to have financial security in the event that you die while you are still working.
If you have a family, then one of your key concerns may be providing for them with the income you earn. If you are concerned about the impact on your family of losing your income should you die before reaching retirement, then pension term assurance could provide financial security for your loved ones in this instance.
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What is personal pension term assurance
If you are in non pensionable employment, i.e. you do not have access to a company pension plan, or you are self employed then personal pension term assurance can be a way to protect your income should you die before retiring.
It is a cost effective form of life insurance and also benefits from tax relief at your marginal rate of income tax. Pension term assurance utilises tax relief available under pensions legislation meaning that your premiums may be lower than for equivalent term life insurance.
Personal pension term assurance can only cover income from paid employment or self employment which would cease when you pass away. It cannot be used to protect income such as income from renting property, dividend payments, or interest on investments as these forms of income may continue after you die.
Benefits of personal pension term assurance
Personal pension term assurance offers several benefits for those who choose this form of life protection:
Peace of mind
Pension term assurance offers peace of mind that your family will be protected if they rely on your income from non pensionable employment or self employment and you die before retiring.
The lump sum provided by pension term assurance will bring them financial security and mean that expenses such as a mortgage, debts, or expenses such as education fees, healthcare expenses, or regular monthly outgoings may be covered if you die and are no longer there to provide for them.
Tax efficient
Tax relief on payments for personal pension term assurance is available at your marginal rate of income tax.
This means that monthly payments for this form of life protection could be reduced by as much as 40%.
Affordable
As pension term assurance offers life protection to a relatively young age, and benefits from tax relief, it is a relatively affordable form of life protection.
Generally the term is up to retirement age, or age 70, depending on the insurer.
Fixed payments
As pension term assurance benefits from fixed payments for the term of the policy, it means that you can plan and budget for the payments for your working life.
If you choose a conversion option or indexation, however, and the sum assured increases, you may pay more during the term of the policy.
Additional options
Indexation means that the amount of cover, or sum assured, in your pension term protection policy increases slightly (usually 3% per year) to increase the benefit in line with inflation. This means that the value of the benefit does not decline over time in real terms.
A conversion option, taken out at the time of purchasing the policy, allows you to increase the level of cover or may even allow you to convert the pension assurance policy to a term insurance policy at the end of the term, depending on the insurer.
Tax advantages of personal pension term assurance
Your payments into a pension term assurance plan benefit from tax relief at your marginal rate of income tax up to certain limits.
These limits a percentage of your relevant net earnings in one year and are age based:
Under 30: 15% of net relevant earnings
Age 30- 39: 20% of net relevant earnings
Age 40- 49: 25% of net relevant earnings
Age 50- 54: 30% of net relevant earnings
Age 55- 59: 35% of net relevant earnings
Age 60+: 40% of net relevant earnings
Note that these percentages apply only to income tax relief. There is no limit to the payments that you can make into the plan. There is an overall earnings limit of €115,000 to avail of tax relief.
These tax allowances include pension contributions to approved pensions as well as payments for personal pension term assurance.
Who provides pension term assurance?
Pension term assurance is provided by the following life insurers:
How much does personal pension term assurance cost?
The cost of the plan will vary, depending on several factors:
Executive pension term assurance
Pension term assurance can be purchased as personal pension term assurance or as executive pension term assurance.
Executive pension term assurance is also known as death in service benefit. This is a slightly different product to personal term life assurance, as the payments are made by an employer on behalf of the employee.
The payments are subject to tax relief from the employer’s corporation tax rather than an employee’s income tax, although under current rules executive pension term assurance is not treated as a benefit in kind.
Executive pension term assurance cover lasts until the employee leaves the company, or retires. If the employee leaves the company, it may be possible for the employee to continue the policy as a personal pension term assurance plan or as a term life insurance plan, depending on the insurer and the details of the plan.
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How is personal pension term assurance different to term life insurance?
One of the key advantages of pension term assurance is that, unlike term life insurance, it benefits from tax relief on monthly payments. This can make it more affordable than term life insurance, especially if you pay income tax at the higher rate of 40%.
Pension term assurance is intended to provide protection for your working life, cover will cease at 65, 66, or whatever age you intend to retire (usually up to age 70). Term life assurance terms are more flexible and can continue later in life.
Unlike term life insurance, pension term assurance is available as single cover only, you cannot choose joint or dual cover to protect the life of your spouse on this plan.
If you choose term life insurance, you can choose a sum assured that covers your family’s needs and lifestyle, however, with pension term assurance your sum assured depends on the income you have from employment or self employment only, some forms of income such as rental income or investment income are not eligible for protection.
Unlike term life insurance, pension term assurance cannot be used as security for a mortgage or a loan. For example, on taking out a mortgage, you would generally be required to have life protection in place. Pension term assurance may not qualify as security in this instance.
What happens if I leave my job or cease working?
If you are no longer in employment or self-employed, then your insurer may continue cover on your pension term assurance plan, up to your original retirement age, provided that you continue to make payments.
Bear in mind, though, that you will no longer be eligible for tax relief on your monthly payments for protection, so your payments are likely to increase.
If you have chosen a conversion option when purchasing a policy, then you may be able to continue your cover as term life insurance rather than pension term assurance.
Contact us today
Pension term assurance provides an invaluable safety net for your family if they rely on your income.
With a tax efficient, affordable, fixed monthly payment, you can ensure that they will be financially secure if you are no longer around to provide that income.
Don’t delay in putting financial protection in place for your family.
Call us or fill in our online assessment today and speak to an insurance specialist or qualified financial advisor at Compare Insurance. If you are in non pensionable employment or are self employed, we can discuss your financial situation and show you ways to maximise the tax relief available for pension term assurance.
