Types of life insurance
- If you're looking for a life insurance policy it's a good idea to research the types available. If you want to know which types of policy suit your circumstances and needs,our guide below provides a brief explanation of the main life insurance categories.
Types of life insurance quick facts:
'Term life' products are popular and relatively inexpensive policies. They are held over a specified length of time, and only pay out the full sum assured should the policyholder die within that term
'Whole of life' policies are also popular but more expensive as they run until the policyholder dies, at which point a predetermined payout is made
With 'level term' the payout remains the same no matter when the policyholder dies, while a 'decreasing term' policy pay out less towards the end of the term - these are designed to reduce in line with financial obligations such as mortgages
Policyholders who opt to take on additional critical illness cover also receive a payout should they be diagnosed with a serious illness or become disabled as a result of an accident
Over 50s life insurance
Over 50s life insurance is often taken out to cover the specific costs involved with death itself, as the payout is often very low. Anyone will be accepted onto a specific over 50s plan without a medical, regardless of age or medical status but most policies will have a maximum age up to which they will accept you as a policyholder.
Payouts from these plans are guaranteed to be made when you die, providing, in some cases, that you don't die within a very short time of taking out the policy. If you take out over 50s life insurance when you are relatively young, you may pay into it for a long time before you receive your payout.
Critical illness insurance
Critical illness insurance is a separate policy, which people often take out alongside their life insurance, although some term policies will include a payout if you should be diagnosed with a terminal illness, so it's worth checking this before you commit to further illness cover.
Most policies have a pre-set list of conditions for which they will pay out. Some have many more than others, so it's important to check the list and make sure you are happy with the conditions covered before committing. As well serious conditions such as cancer and heart disease, many critical illness policies will also pay out if you become disabled as a result of an accident.
There are alternatives to critical illness cover, depending on what you would spend the tax-free payout on. For example, private health insurance is an option, although this will not help you if you are incapacitated by illness and cannot work to pay off your mortgage, for example.
Whole of life policies
A whole of life insurance policy lasts for the entirety of your life, with a guaranteed payout when you die. As a payout will definitely be made at some point, the premiums for this type of insurance tend to be higher than those for term insurance.
Some whole of life insurance policies have a predetermined payout amount, which will not change, while others are linked to various investment products with payout amounts that change depending on the performance of the investments.
Term life insurance
Term life insurance is perhaps the most popular option for average families, largely because they are usually straightforward and lower cost. Term insurance (or term assurance as it is sometimes known) enables you to choose the period and the level of cover (the payout, or the 'sum assured') for which you wish to be insured. Quite simply, if you die within the designated term of the policy, it will pay out to your family. Once the term has expired you will not receive any money nor any of the premiums paid back.
Level-term policies are one of the two main types of term insurance. Level-term policies pay out one lump sum, if you should pass away during the period of time agreed at the beginning of the policy. The amount paid in premiums remains the same, as does the value of the payout.
Decreasing-term life insurance policies also operate over a set period of time, like level-term policies, but decreasing-term policies pay out less as the term of the policy progresses. They can be very useful for those whose main objective is to pay off their mortgage when they die, for example. This type of policy is also a popular choice among those looking to reduce their inheritance tax exposure as they age.
Family income benefit policies
Family income benefit life insurance policies fall under the decreasing-term life insurance category, but instead of paying out one lump sum upon death, they pay out a monthly amount, usually to reflect what you, as the policyholder, contributed to the household, and therefore what your family would otherwise be living without in the event of your death.
A guaranteed policy is simply a life insurance policy for which you pay the same premiums throughout the cover period. Policyholders enjoy a sense of security as they know their premiums won't increase over time, allowing for better financial planning.
Holders of guaranteed policies also need not worry if their health status changes, as their premiums remain the same regardless. However, as a result of this, guaranteed policies tend to be pricier than the alternative, which is a reviewable policy, at the outset.
Reviewable policies are often cheaper at the outset of the cover term but the premiums are reviewed periodically, which could mean that they become more expensive. Policyholders could see premiums increase if their circumstances change and as they age, for example.
When you take out any kind of life insurance, it's vital to establish whether the premiums are reviewable as it's easy to be lured into a policy with a low starting point, only to find out after the papers are signed that the premiums aren't set in stone for the term of the policy.
On the other hand, if you are comfortable with a policy that is cheap now, and is likely to remain cheap for five to ten years, but may increase in cost later, a reviewable policy could be an appropriate choice.
Friendly Society policies
If you choose to put your savings into a Friendly Society savings plan, you will have life insurance cover included. Friendly Societies are mutual associations owned by their members. They offer tax-free savings of up to £270 per year (this is offered in addition to your tax-free ISA allowance) and they use some of this money to purchase life insurance before investing the rest in a with-profits fund. The savings period is usually somewhere between ten and 25 years.
Those saving with a Friendly Society savings plan don't pay tax on their savings providing they keep them in the plan for the entire duration of the investment period. The life insurance element of a Friendly Society savings plan will only pay out if you die within the investment period.
An endowment policy is a savings scheme sold by life insurance firms, which will pay out a lump sum to your loved ones if you die within the predetermined term of the policy. The life insurance firm uses some of your monthly or annual payments to buy life insurance cover and invests the rest into a with-profits fund.
Endowment policies are usually used as a long-term savings product by those who are happy to have their savings tied up for a period of at least ten years.
Employee life insurance, or 'death-in-service' cover
Many employers will offer 'death-in-service' life insurance to their employees, which will pay out a lump sum should you die while on their payroll. The death does not have to be work-related and the benefit is usually free to employees. Some employees are unaware of this benefit and take out life insurance they may not need as a result - so it's always worth checking if you are covered at work before taking out a policy of your own.
There are factors to consider though, such as the payout amount, which is often reasonably low (it is often based on a multiple of your annual salary) compared with the amount your family may actually need, should you die. Your death-in-service policy may also be linked to your company pension scheme and you may have to be a member of the scheme to qualify for the life insurance.
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