Many of us purchase a life insurance policy to provide us with peace of mind that when we die our loved ones will be financially safeguarded. There are different types of life insurance policy so it can be difficult to choose the right one to suit your requirements.
When deciding which life insurance policy is best for you you need to think about how much you can realistically afford to pay in premiums, how long you would like the cover to last, and the amount that you would like the policy to pay out in the event of a claim.
The two main types of policy are whole-of-life insurance and term insurance. Term insurance pays out either a monthly income or a lump sum should you die within the period stipulated by the policy. If you live beyond this period then the policy simply ends and you receive no payment. Whole-of-life insurance, on the other hand, provides protection throughout your whole lifetime. Whole-of-life insurance is considerably more expensive than term insurance as it is guaranteed to pay out at some point.
Term insurance can also be broken down into a number of different categories, the first being increasing term insurance which factors in the rising cost of living during the lifetime of the policy. Opposite to this is level term insurance which pays out a fixed amount, which is not linked to inflation, when the policy ends.
Decreasing term insurance is suited to those people who wish to use their life insurance policy to cover a debt that will slowly decrease over time such as a repayment mortgage. This type of cover incurs lower premiums.
If you are looking for a more flexible type of life insurance policy then renewable term and convertible term life insurance policies offer a suitable alternative. Renewable term insurance offers policyholders the option of renewing their cover when the policy finishes without the need for a medical examination. Convertible term insurance allows policyholders to convert their policy into a whole-of-life policy at any point during the term of the policy regardless of any change to the health of the policyholder.
If you want to keep your premiums low and have financial obligations with a partner or relative then joint life insurance may be a feasible option. However, bear in mind that this type of policy ends when one of the policyholders dies.
If you have a family to consider then a family income benefit policy could be the ideal choice as it pays out an agreed monthly income from the date that you die to the end of the policy term.
Whole-of-life insurance provides cover for your whole lifetime. As long as payments have been maintained your family or beneficiaries will receive a lump sum payment whatever age you die. The majority of these types of policies guarantee that your premiums will not alter for the first ten years, although if you choose a reviewable policy your premium could rise by quite a large amount after this ten-year period ends in order to make sure that the policy is on track to pay out the expected lump sum. If you are struggling to pay the increased premium then you have the option of either accepting that the expected sum will be smaller than initially agreed, or you can cash in the policy. Non-reviewable policies are available that do have permanently fixed premiums but they are likely to be substantially more expensive.
In general, whole-of-life insurance comes in a number of different forms including with-profit-whole-of life policies that pay out the sum assured upon the death of the policyholder plus any investment profits, and non-profit-whole-of-life policies that contain no investment element but simply pay out a lump sum upon the death of the policyholder. With-profit-whole-of-life policies have become less popular in recent years as many have performed badly.
Other types of whole-of-life insurance policies include over-50 plans and low-cost policies. Plans designed for the over 50s are usually taken out with the intention of them paying for funeral costs so most often they pay out a relatively small amount; usually between £500 and £2000. These types of policy can often be a poor investment as if the policyholder lives for a long time they can end up paying in more than the plan will eventually pay out. Low cost policies are a with-profits plan that will pay out the value of the policy, or the guaranteed death benefit, whichever is the highest.
Endowment policies used to be very popular with homeowners as they are a life insurance policy coupled with an investment scheme which promised to pay off interest-only mortgages when they matured. However, due to the recent turmoil in the financial markets many of these policies have under-performed. They are still available but come with no guarantee that you will receive a satisfactory pay-out.
When looking for a life insurance policy it is important to weigh up the advantages and disadvantages of all the policies on offer in order to find cover that is right for both you and your dependents. Due to the complexity of many of the policies on offer it is wise to seek advice from a professional before committing to any sort of life insurance plan.