Types of Life Insurance

What Are The Types of Life Insurance? A Guide To Policy Types

 

Everything you need to know about choosing your life insurance policy.

A life insurance policy ensures your loved ones are protected and provided for in the event of your death. But with so many policies available, it can be difficult to know which one best suits you and your needs.

I’m Insured have put together this extensive guide that answers everything you need to know when choosing a life insurance policy, helping you to pick the perfect one for you.

Life insurance and life assurance are often used interchangeably, but there is a slight difference. Life assurance is when the policyholder will eventually earn a pay out (whole-of-life insurance), whereas life insurance policies are for a fixed time, and finish at the end of this term (term insurance). Read more about this here

There are two main types of life insurance: "term" insurance and "whole-of-life" insurance. Within those types of insurance, there are a range of different policies you can take out to suit your requirements. Here are the key differences...

 

Term Insurance 

This covers someone for a fixed period of time. Once the date of this ends, the policy also ends, and there would be no pay out. 

 

Whole-of-life Insurance

This type of insurance doesn’t last for an agreed period of time, but covers someone for the rest of their life, and beneficiaries will get a pay out whenever they die.

 

There are three main types of ‘term’ insurance to choose from:

• Level term
• Decreasing term
• Increasing term

They all cover someone for an agreed time period, and don’t pay out after this ends.

Other types of policies include: 

• Whole-of-life
• Joint
• Family income benefit 

 

Here is an easy to understand run down of each type of life insurance:

 

What is level term insurance?

Level term life insurance is for an agreed period of time - the insurance company will pay out a fixed lump sum if the policyholder dies within this agreed term.

This type of cover means beneficiaries receive a specific sum, leaving them secure if the policyholder is no longer around.

There are several reasons to choose level term insurance, and cover a specific amount of money. For example, an interest-only mortgage, a fixed amount of debt, a lump sum payout for children, or to maintain the same standard of living for the family who are left behind.

Benefits: 

• Provides peace of mind, leaving the policyholder confident that any financial burdens such as debts and mortgages can be paid, without passing these onto a spouse or family.
• If someone is leaving a sizable estate, and their loved ones may receive a large bill, then level life cover allows them to meet this obligation without reaching into their existing finances. 

The main disadvantage of level term insurance, is that it does not account for inflation. Therefore, the payout value may be less than the value when it was purchased. 

 

What is increasing term insurance?

Increasing term life insurance is for a fixed period of time, and during this term, the cover sum goes up each year by a fixed amount.

If the policyholder takes out life insurance to cover £200,000 today, over time, inflation can diminish the relative value of this sum. So while the payout value would still be £200,000, the amount this is worth to loved ones’ will decrease over time.

Therefore, increasing term life insurance takes inflation changes into account, so the payout amount rises alongside the inflation rate.

Benefits: 

• Increasing term policies protect the size of the payout - whether that's for a debt repayment or a substantial purchase.
• Protects loved ones against the rising cost of living.
• Good option for paying for children’s school or university fees.

Increasing life insurance usually offers the highest payout sum, so the main disadvantage is that monthly premiums are usually higher than for decreasing or level term policies. 

 

What is decreasing term life insurance?

Decreasing life insurance lasts for a pre-set length of time (and is also known as mortgage protection insurance) - the amount of cover reduces in line with the way a repayment mortgage decreases. This policy pays out in the event of the policyholder’s death during that agreed time frame. 

Decreasing policies are ideal for someone with financial commitments that reduce over time, for example, dependents who need support with a mortgage repayment, but can also cover other day-to-day living expenses when the policyholder dies.

Decreasing life insurance isn’t just for mortgage cover, there are other instances when this policy makes sense, such as, parents wanting an insurance policy to pay their children a larger sum if they pass away while they’re still young, but less as they get older and become financially independent.

Benefits:

• During the length of a policy, this will pay out a cash sum if the policyholder dies or is diagnosed with a terminal illness and they have a life expectancy of less than a year.
• Choose the amount of cover needed and how long for.
• Helps to ensure the policyholder won’t leave their family with debts if they pass away during the agreed term.

The disadvantage of decreasing life insurance is that the policyholder only covers themselves for the cost of their debts, so there won't be much of the payout left once any loans have been paid.

 

What is whole-of-life insurance?

Whole-of-life policies are ongoing for the rest of the policyholder’s life, and they pay out in the event of their death. 

This type of policy is best for someone looking to cover their funeral costs or inheritance planning. If the policyholder has a large estate, inheritance tax will be charged on the value of this. However, the tax will need to be paid before the beneficiaries will be given access to the estate. Whole-of-life insurance helps to avoid this issue.

Benefits: 

• As long as the policyholder keeps up their premiums, whole-of-life assurance is guaranteed to be paid regardless of when they die.
• The premium remains the same for life.

Whole-of-life policies are usually more expensive than term insurance because the person is guaranteed to pass away at some point, and therefore that the policy will always have to pay out. 

 

What is a family income benefit policy?

A family income benefit policy is a type of term life insurance, but rather than receiving a lump sum, the payout provides regular financial support to the family of a policyholder, if they die.

This type of life insurance is mostly appropriate to families who wish to insure monthly outgoings which might be put as risk should the worst happen.

Benefits: 

• Secures an on-going income for the policyholder’s family.
• Avoids disruption to loved ones’ lives, and they can avoid changing their standard of living, when the policyholder passes away.

 

What is joint life insurance?

Joint life insurance covers two people – typically spouses or domestic partners, but this can be business partners too. With a joint policy, the payout is automatically given to the other partner named on the policy. This policy will only pay out once.

Benefits: 

• A joint policy is generally cheaper than two single policies.
• Helps to ensure the surviving partner, and children, will be looked after if one of the policyholders dies.

The disadvantage of joint life insurance is when the first partner passes away, this leaves the surviving partner without insurance for the rest of their life.

 

Choosing a life insurance policy is personal, and depends on your needs, lifestyle, budget and much more - there could be one type of life insurance that works for you, or multiple. Generally, though, the more protection your policy offers, the more your premiums will cost.

 

Calculate how much cover you need

It’s important to get enough cover to protect your family in the event of your death. Therefore, you should work out how much money is needed to financially protect them. This sum needs to take into account their living costs, the mortgage, any other debts, any future inheritance tax they may need to pay etc.

To make sure you have the correct amount of life insurance to cover all of your needs, we've designed an easy life insurance calculator to help give you peace of mind. 

Use our fast and free life insurance calculator to work out how much cover you might need before looking for quotes.

Once you have decided what you need your policy to cover, and for how much, you can choose a type of policy.

 

Choose a type of policy 

• If you have an interest-only mortgage, a fixed amount of debt, or a lump sum payout for children, we’d recommend level term insurance.
• If you have financial commitments that decrease over time, such as a mortgage, we’d recommend decreasing term insurance (mortgage protection insurance).
• If you have dependents or a partner who would suffer financially day-to-day if passed away, we’d recommend a family income benefit policy.
• If you are wanting to cover your funeral costs or are planning your inheritance tax situation, we’d recommend a whole-of-life policy.

 

We’re here to help

If you are unsure about what policy to choose and would like advice, you can enlist help from insurance brokers. Here at I’m Insured, we strive to find the most suitable policy for you and your family - you can call to speak to one of our experts on 0800 334 5980. 

Life insurance protects you and your loved ones financially. Use our simple online tool to compare UK life insurance quotes and find the best prices and cover for you. Start your online quote now.

 

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