Whilst looking through the different life insurance policy types on offer, it’s crucial you understand why you are getting life insurance in the first place and what benefits each one will give you and your family.
Some of the most appealing benefits of life insurance include paying off debts, expenses, taxes and securing your partner/children’s/families future once you die.
The right life insurance policy for you will depend on a variety of social and economic factors that you need to take into account. Do you have enough money to protect your dependents? Is a single or joint policy more beneficial to you in your current situation? What’s the difference between ‘Term’ and ‘Whole-of-Life’ insurance?
Term Insurance and Whole-of-Life Insurance Differences
When it comes to life insurance, the two main types are ‘Term Insurance’ & ‘Whole-of-life’. There are several sub category of policy that you may wish to look at but whatever one you finally choose to go with, they will usually fall into these main two policies.
Put simply, ‘Term Insurance’ provides coverage for a certain period of time. If you die within that time your beneficiaries get paid a lump sum. If you don’t die the insurer doesn’t pay out and the cover lapses.
Whole-of-Life Insurance does exactly what it says on the tin. It lasts for your entire life until you die but premiums are typically much higher.
For a more detailed overview, read on…
Term Insurance – The most basic type of life insurance which involves choosing the amount you want to be insure for and the length of time you want the cover to last. It’s the cheapest form of life insurance and you typically take out cover for around 10-20 years. If you die within this period then the insurer pays out a lump sum fee in one go and if you manage to stay alive you receive nothing and the cover ends.
The two main subsets of this type of insurance is ‘level-term’ and ‘decreasing term’ insurance but there’s a whole host of other options to choose from
Level Term Insurance – With level term insurance, your policy lasts for an arranged number of years and will pay out a fixed amount if you die during that period. This is a relatively cheap and straightforward policy.
Decreasing Term Insurance – A prime example of what a decreasing term insurance policy may be used for is any debt that reduces over time e.g. a repayment mortgage. Premiums tend to be much cheaper for this type of policy as the amount you are insured for reduces over time.
Increasing Term insurance – factors in the rising cost of living and inflation. As what you are insured for rises over time premiums will also increase to reflect this. Be prepared for a price hike over the length of the policy!
Renewable term insurance
This policy allows you to renew and extend the cover when the policy comes to an end giving you more flexibility.
Convertible term insurance – allows policyholders to convert their term insurance policy into a whole-of-life one if and when they want to. The insurer has to comply regardless of any changes to the policyholders health. This will, however, mean an increase in premiums.
Whole-of-life Insurance – covers you until death as long as you continue to pay the premiums. As everyone will unfortunately die at some point, these policies are more expensive than term insurance which have the potential to never pay out.
This policy is generally used to provide the investment needed to cover a funeral or inheritance tax planning and the proceeds of the cover tend to go to the policyholder’s family or beneficiaries.
Other Types of Life Insurance
Joint life insurance – With joint life insurance you can decide whether you want to pay out on the first or last death so it give you flexibility with your finances.
Although Joint Life Insurance may be cheaper on the face of it, for not a great deal more you can get two very tailored single life insurance policies that give you even more freedom than a joint policy.
For example, if you and your partner have different health issues or financial standings this can make a joint policy more tricky so make sure to assess the pros and cons of each policy.
Family income benefit – will pay out a decreasing monthly income each month to the end of the policy cover. As the insurer pays out less than with level term insurance, the premiums are naturally lower.
However, be aware that this policy won’t pay out for a long period of time if the policyholder dies late into the term of the cover. This type of cover is perfect for those whose beneficiaries may suffer heavily if the main earner in the family dies.