 It isn't enough just to know that you need a life insurance policy. If you have dependents, it's just as bad to have the wrong policy for your circumstances as it is to have no life insurance. For example, if you actually need a life insurance policy that pays out regardless of when you die, a term insurance policy would be a waste of money because there is a chance that you would outlive the policy length and therefore be left with no cover. Here is a basic overview of the different types of life insurance policy available in the market.
Term Life Insurance
Term life insurance, also known as term assurance, is the cheapest type of life insurance you can get. Having said that, you should never make a decision about a life insurance policy purely based on cost – skimping on life insurance cover for the sake of saving money is almost as risky as having no life insurance at all. Term insurance covers you for the set time period that you choose at the start of the policy (the 'term').
If you die during the term of the policy, your beneficiary – the person that you have named in the policy – will receive a cash payout. If you only need the policy for the length of your mortgage term, you can opt for a decreasing term life insurance policy where the cover will decrease year on year to reflect your diminishing mortgage balance. The alternative is level term life insurance, where the cover and payout remain unchanged throughout. |
There are a number of other variations on a term life insurance policy, including renewable term insurance, where you have the option to extend your policy on the expiry date without undergoing a further medical exam, and increasing term insurance, where the 'sum assured' (payout) increases year on year to combat rising inflation.
Whole of Life Insurance
The main reason why you would buy whole of life insurance is so that you can guarantee that regardless of when you die, your family will be protected financially. This is a more expensive type of policy because there is no risk involved – as there is with term life insurance – that you will outlive the policy term.
You will usually find that these types of policy come with a guarantee that the premium costs will not increase for the first ten years. Whole of life policies usually also come with a yearly increase option that means you can combat the effects of inflation on the lump sum cash payout by increasing the cover by a certain percentage.
It's worth bearing in mind that because you are accumulating value on your whole of life policy over a number of years, you do have the option of cashing in the value before the end of the policy term. You should also consider putting the policy in trust, meaning that it is protected from Inheritance Tax after your death. Most insurers will do this for no additional cost, but if your financial affairs are complicated there may be a solicitor's fee to pay for putting a policy in trust for your beneficiary or beneficiaries. Speak to an experienced life insurance adviser to go through your options, and don't spend another day with no life insurance if you have a family to support. |
