What are the different types of Life Insurance?
The right type of Life Insurance for you will depend on your individual circumstances, such as how long you’d like the protection to last for, how much money you want the policy to pay out in the event of claim, and how much you can afford to pay in premiums. The mains type of Life Insurance are:
There are several types of term insurance, so it’s important to understand which is likely to suit you best.
Level term insurance
Level term insurance pays out a fixed lump sum if you die during the policy term. This lump sum doesn’t change over time, so you know exactly what any dependents will be left with in the event that you die.
Increasing term insurance
Many people want to take out life insurance which will factor in the rising cost of living, and therefore opt for increasing term insurance. This type of life insurance policy is designed to combat the erosion of our money’s purchasing power each year due to inflation, so that the sum insured maintains its real value throughout the term.
The sum insured either increases by a fixed amount each year, or rises in line with the Retail Prices Index (RPI) measure of inflation.
However, as the sum insured rises over time, premiums will also increase, so if you are considering this kind of policy, you must be prepared to pay more as time goes by (see also index-linked term insurance).
Decreasing term insurance
If you are looking for life insurance to cover a debt that will gradually reduce over time, such as a repayment mortgage, then decreasing term insurance is worth considering.
With this kind of cover, any pay-out also reduces over time, which means the premiums are lower than for level term insurance.
Convertible term insurance
As its name suggests, convertible term insurance enables policyholders to convert their policy into a whole-of-life policy if they want to. The insurer is obliged to convert the policy regardless of any changes to the policyholder’s health.
However, remember that changing your cover so that it lasts for your lifetime rather than a set term will mean an increase in premiums.
Renewable term insurance
With renewable term insurance, policyholders have the option to renew their life cover when the policy term finishes without the need for a health review.
Family income benefit
A family income benefit policy will pay out a monthly income of an agreed amount each month from the date of the claim to the end of the policy term. As the insurer would, in total, pay out less than with a level term insurance plan, the premiums are lower. But this type of policy would not enable you to clear a capital debt such as a mortgage.
As the name suggests, a whole of life insurance policy provides cover for your entire lifetime. It guarantees a lump sum payment at whatever age the policyholder dies, provided premiums have been paid continuously from the start of the policy.
The proceeds of the policy will usually go to the policyholder’s family or beneficiaries of their estate.
This kind of policy is often taken out to cover future inheritance tax bills. Inheritance tax is payable at 40% on the value of your estate over £325,000 (for the tax year 2014/15), which includes your property and all other assets. Premiums are high because a claim is inevitable.