Life Insurance Types

Types of Life Insurance

What type of life insurance policy should you buy?

Life insurance policies are personal so it is important to think about whom you are leaving the money to; some people will be able to cope with a lump-sum but others may be better suited to receiving pay-out in instalments through income policies. There are two types of cover available on the market:

Term assurance

This form of life insurance is the most basic form and it pays when you pass away during a fixed period of time, otherwise know as a set "term". By far the most popular type of life insurance, term insurance is the cheapest option on the market. The way it works is that you decide on how much you want your family to receive, if you then die within the set term you are covered it will then pay out the agreed sum. It is completely up to you as to how long you want the cover to last, normally term insurance lasts for 15 to 25 years. If you live beyond the set term the insurance policy will not pay out anything.

There are two types of term assurance that you will want to take a look at, sometimes getting a combination of them may work out best for you and your family:

Level-term life insurance policies - This will pay your family out a lump sum of money should you die within a set term. Normally the amount you will pay on a monthly basis, otherwise known as a premium, will stay consistent throughout the term. These type of policies are a good option if you are looking to offer your family protection to take care of their living expenses. It will provide them with a lump sum of money that they can invest to live on once you have died. It could also work well if they need a set amount of money for a certain amount of time.

Decreasing-term life insurance policies - These kind of policies are more suited for helping your family out with a mortgage after you have gone. They are designed in that the amount your policy covers you for decreases over the term of the policy. This means that if you had a mortgage to pay off, this would decrease over the years as would your policy. The premiums for this type of term assurance are alot cheaper than Level-term life insurance policies. You may also find this type of policy useful for inheritance tax planning purposes.

There is also another type of decreasing-term policy called Family income benefit policy:

Family income benefit policies - Whilst the aforementioned policies will pay out a lump sum, a Family income benefit policy will pay out a regular income to your family until the expiry of the policy if you die. The one great advantage of this is that it will be alot easier for you to work out the amount they need to live. For example if you earn £2,500 (after tax) per month, you can arrange for this amount to be paid out on a monthly basis. Be aware that there is a disadvantage to this, take the following example; if you were to die two years into a 20 year family income benefit policy, your family would receive £2,500 per month for 18 years. If you were to pass away a year before the policy ends, your family would get £2,500 per month for just one year.

Whole-of-life policies

As with the name, this policy is designed to offer life insurance that can last your whole lifetime. This policy will pay-out regardless when you pass away; with no fixed term limits and no decreasing pay scheme. These are very expensive in the short run but if taken out early and to protect substantial inheritance is the most comprehensive policy available.