If you’ve decided to buy life insurance, working out which type of policy to go for can be tricky as there are several different kinds of cover to choose from.
It’s made even harder due to the fact that, as with most financial products, there’s loads of jargon to get to grips with. Here, we explain everything you need to know about the different types of life insurance, so that you can be certain you’re buying the right kind of cover to suit your needs.
Main types of life insurance
Life insurance is intended to provide a financial cushion for your loved ones when you die. It’s up to you to decide how much cover you want, so many people choose an amount that will pay off any debts, such as their mortgage, loans and credit cards as well as any funeral costs. You may decide to opt for a bigger sum, to ensure living expenses are also covered if you’re no longer around to provide an income.
The main types of life insurance available are:
Term life insurance
Term life insurance gets its name because, in return for you paying monthly premiums, it provides you with life cover for a set period of time, or ‘term’. Monthly premiums will be higher the older you are, if you are a smoker or if you have a serious medical condition such as heart disease or diabetes – as depressingly the insurer will assume that there is a higher likelihood of you dying during the set period of cover than a younger, non-smoker with no medical conditions.
This type of policy is often taken out alongside a mortgage so that if you die during the mortgage term, your life insurance policy will pay off your mortgage.
There are three types of cover you can choose from:
Level payout – this is where you maintain the same amount of life cover over the policy term which means you’ll receive the same fixed sum whether you died at the beginning or end of the policy term.
Decreasing payout – this is where the amount your loved ones would receive gradually reduces over time. This is a cheaper option than a level payout, as the level of cover reduces over time. Which means that it can be a popular option if you’re on a tight budget and are buying life cover specifically to cover your mortgage, as the amount of any payout reduces in line with the amount you owe on your mortgage.
Increasing payout – there’s also the option of an increasing payout, which means any payout rises in line with inflation. This can provide peace of mind that if, for example, you are taking out life insurance to help provide an income for someone – if you were to die a couple of decades after taking out cover, the payout will have grown sufficiently to keep up with rising living costs. As you might expect, your premiums will usually increase as the amount of cover you have goes up.
With term life insurance, you’ll only receive a payout if you die during the policy term. If you die when your policy has finished, you won’t receive anything despite the fact you’ve paid premiums for many years, so if you want to remain protected you’ll need to take out a new policy to cover you after the term ends. Cover will usually be more expensive at that point as you’ll be older, and premiums could be much steeper if you’ve developed any health issues, unless you opted for a renewable term insurance policy when you first bought cover. This means you’ll be able to renew your cover without going through another health check.
When buying term insurance, you’ll usually be offered the choice of guaranteed or reviewable premiums. If you choose guaranteed premiums, your premiums will remain the same through the term of your policy, whereas reviewable premiums usually start at a lower level but then increase during the term of your cover.
Whole of life cover
As its name suggests, whole of life cover is designed to protect you for your whole life, so you’re guaranteed to receive a payout. This type of cover is therefore much more expensive than term assurance. If you’re considering this type of policy, you should be confident that you’ll be able to pay your premiums for the rest of your life, as if you let them lapse for any reason, your cover will cease and you may have to pay significantly more to restart a new policy.
Family Income Benefit
Rather than paying out a lump sum when you die, a Family Income Benefit policy pays a tax-free monthly income to your beneficiaries for a set period. For example, you might decide that you would like them to receive £1,500 a month in the event of your death in the next 10 years. If you died in year one, your beneficiaries would receive this amount every month for the remaining nine years. If you die in the ninth year, however, they’d only get £1,500 a month for a year, until the policy ends. Family Income Benefit is often more affordable than other kinds of life cover, as the insurer won’t have to make a big lump sum payment if you die.
The main downside of this kind of cover is that as it’s not a lump sum, your beneficiaries won’t be able to pay off the mortgage or any other substantial debts when you die, and will still have to cover these costs out of monthly income.
Over 50s cover
Unlike other types of life insurance, you won’t be asked for your medical history when you apply for over-50s cover, so you’re guaranteed to be accepted. You’re also guaranteed a payout, as the policy runs until you die.
The main downsides of over 50s cover are that the maximum payout is usually pretty low, typically around £3,000. That means if you take out cover when you’re in your early 50s and live until you’re 80 or older, the chances are you’ll end up paying far more in premiums than the policy will ever pay out. However, this type of cover can be useful for those who are turned down for other types of life insurance due to health conditions, or because of their lifestyle.
It’s helpful to be aware that there’s also usually a ‘qualification period’ which typically lasts for one or two years, and means that if you die during this time, your beneficiaries will only get the premiums you’ve paid back rather than a full payout.
Joint or single cover?
If you’re married or with a partner, you might want to consider taking out a joint life policy rather than two individual policies. Having separate life cover means that if anything happened to either person – or both – each policy would pay out.
With joint life cover, however, premiums might be slightly cheaper but the policy usually only pays out once when the first person named on the policy dies, so the other will be left uninsured. A few providers offer cover which pays out on the second death only.
Where can I buy life cover?
Like any insurance, always shop around before you purchase a policy. If you have any pre-existing medical conditions it can be helpful to use a fee free specialist life insurance broker to help you navigate the various acceptance criteria and find the right insurance cover for you.
There are a number of fee free brokers available in the market, but if you’re looking for somewhere to start, we’ve partnered with Anorak to offer fee free advice to our members. All you need to do is answer a few simple questions about your life and finances to get personalised fee-free advice and quotes from the whole market instantly.
As with all forms of insurance, you must be completely honest in your answers to the questions on your life insurance application – for example your medical history – otherwise the policy could be invalidated and those you are looking to protect might not receive what you expect them to.
You can find out more about the importance of life insurance in our article Why life insurance matters.
Are you thinking about buying life cover, or have you recently taken out a policy? If so, we’d be interested in hearing from you. You can join the money conversation on the Rest Less Community or leave a comment below.