Types of Life Insurance
Life insurance can often seem complex, but actually it's a fairly straightforward product when you know what to look for.
Sometimes you'll also see it called Life 'assurance'. Don't worry about this; although the two terms differ semantically - in terms of your policy, they're interchangeable.
There are 2 main types of life insurance available:
Term assurance/insurance
Whole-of-life cover
Term Insurance
Term Insurance is designed to cover you for a set period of time.
There are a few different types available:
Level term life insurance
An agreed amount of money is paid out by the insurance provider only if you die within a specified timeframe (e.g. within 30 years of taking out the policy). The amount remains unchanged throughout this period. The policy will cease after a claim is made and the amount is paid to your dependents or when the timeframe expires with no claims made.
Decreasing term life insurance
This is sometimes called mortgage cover, as it's designed to help pay off your outstanding mortgage in the event of death. The life insurance policy will be taken out for a set period (normally the same as your mortgage repayment period). The amount of money you have insured will then decrease in line with your mortgage balance. The thinking behind this is, the more you repay of your mortgage - the less cover you'll need. It's worth noting that if interest rates jumped up significantly, your policy may not guarantee to cover the mortgage.
Renewable term life insurance
This is similar to level term, although you'll have the option of renewing your policy - normally without the need for a medical review.
Increasing term insurance
With this type of policy, the amount you've insured (your sum insured) is increased each year in line with inflation.
Convertible term
Again, this is similar to level term cover, but there's the option of converting to a different type of cover, such as a whole-of-life or an endowment policy.
Whole of Life
Whole-of-life cover differs from term insurance in that it covers you throughout your entire life (just what it says on the tin!).
This means your dependents would receive a pay-out regardless of when you die, as there is no fixed length of the policy. Whole-of-life policies will normally carry higher premiums than term insurance.
Please note that Policy Expert does not offer advice. If you’re thinking about purchasing a life insurance policy, it may be wise to consult an independent financial advisor.
How much cover do I need?
When deciding on your sum insured (the total amount you're insured for), it's a good idea to take all of your financial commitments into consideration. It's likely that these financial obligations would still continue on for your dependents after your death.
We've put together a quick list of things you might want to think about when deciding on how much life insurance cover you need.
Any outstanding debts that you don't want to leave your partner/dependents with:
Mortgage
Other loans or bills
Credit cards
Living expenses:
Loss of wages (particularly if you are the sole or primary earner)
School/college fees
Cost of any medical care
Cost of childcare
Normal household expenses and utilities
One-off costs:
Funeral expenses
Also, take into consideration any assets that you already have, such as death in service cover. These other policies may mean you can reduce the amount of life insurance cover you need.
If you’re thinking about purchasing a life insurance policy, it may be wise to consult an independent financial advisor before making a decision.
Critical Illness Cover
Unlike a terminal illness, a critical illness does have a chance of survival.
A critical illness can take many forms - such as cancer, heart attacks and strokes. The critical illnesses covered by insurance can differ between policies, so it's very important to know exactly what your provider would cover you for. It's also wise to read all the terms and conditions, to understand any exclusions there might be. For example, you might be covered for a certain cancer - but only if it's at an advanced stage.
Critical illness cover is designed to pay out a lump sum on the diagnosis of a critical illness (provided it's covered by your policy and defined in your policy documents). This pay-out could help ease financial pressures at this difficult time, especially if your condition prevents you from working.
Critical illness cover can usually be bought as a stand-alone policy, but is more often combined with a joint or single life insurance policy.
Normally, critical illness insurance will not cover you for the following:
An illness that's self inflicted
Illness as a result of drug and alcohol abuse
HIV and Aids (unless contracted through a blood transfusion, physical attack or work in the armed forces, medical profession or emergency services)
An illness that's occurred through ignoring medical advice
Life Insurance options
Single or joint policy?
Typically, you can buy life insurance as either a single or joint policy. A single policy is fairly obvious; it would cover just one life - that's yours (as the policyholder). If you were to die, the policy would pay out and then the insurance would cease.
However, if you're a couple, you might want to get life insurance as a joint policy. This would cover both of you under the same policy and would normally pay out on a first death basis. This means, if either one of you were to die, the policy would pay out and then cease. The remaining person would then no longer be covered.
A joint policy may work out cheaper, but this is not necessarily guaranteed. It's therefore worth considering the benefits of two single policies as well.
Terminal illness cover
When considering life insurance policies, check to see if they include terminal illness cover. A terminal illness is one that has a life expectancy and no real chance of recovery. If terminal illness cover is included, your policy will normally outline which terminal conditions would be covered. Always check the policy details carefully. Some providers may pay out a lump sum on the diagnosis of a terminal illness. This could help you to make financial plans with your loved ones while you're still alive.
Life insurance written in trust
If you're thinking about placing a policy in trust, it's a good idea to seek specialist advice to make sure this is a suitable option for you.
If your life insurance policy is written in trust, it means that your insurer will pay out directly to the named beneficiaries. This usually means that the money is not subject to inheritance tax (as it doesn't go to form part of your estate).
Endowment life insurance
As with a standard life insurance policy, if you die within the term of you policy, you should receive the agreed lump sum. However, if at the end of the policy term, there have been no claims - you'll still normally receive a lump sum. Endowment life insurance is usually linked to an endowment mortgage to help pay-off the outstanding mortgage amount.
Please note that Policy Expert does not offer advice. If you’re thinking about purchasing a life insurance policy, it may be wise to consult an independent financial advisor.
Know-how
Take a browse through some of our helpful life insurance articles: