Life insurance is an important financial product that gives you the ability to leave money for your family in the event of your death. This sum can be used to support your family due to lost income, to cover funeral costs, or to pay off any large debts that you may have left behind, such as a mortgage, and generally make life as easy and enjoyable as possible in your absence.
The number of people taking out life insurance policies in the UK is actually decreasing, but life insurance should be a serious consideration if you want to ensure that your family are protected in the future, especially when a death in the family accounts for a difficult time.
Your monthly premiums depend on a number of factors including:
- your age
- what level of cover you need or desire
- type of policy you choose to take out.
With a number of different types of life insurance to choose from, it is crucial that you choose the most appropriate cover for you so you get the protection and pay out you desire.
Different Types of Life Insurance
Term Life Insurance
The most basic form of life insurance is known as Term Life Insurance. This is a good option for those who need a pay-out that will cover the costs of large debts, such as your mortgage, and/or to support your family with children still living at home and in full-time education.
With term life insurance, you are able to select the amount of money you want to be insured for and how long you want the cover to last, bearing in mind that the length of your cover will be a direct correlation to the size of your premiums.
If you die within your policy terms, the life insurance company will pay out the agreed amount to your beneficiaries, however, if your policy terms end before you die, you will lose the premiums you have already paid, and they will not be returned.
Generally, term life cover should not need to last for more than 25 years as this is the typical length of a mortgage period and so the mortgage will have already been paid off by the time the life insurance policy comes to an end.
There are three types of term life insurance that you may want to consider:
Level-term insurance is where a lump sum is paid out when you die, as normal, but your cover amount stays the same over the whole term. No matter how far into your policy you are when you die, your family will receive the same pay-out amount.
In a decreasing-term policy, your payout amount will decrease annually as the policy matures. This is most commonly taken out to cover a debt that also decreases over time, such as a mortgage, giving this cover the alternative name of ‘mortgage life insurance’.
Because of this, it can be beneficial to take out a decreasing-term life insurance policy that offers the same amount of cover as the amount of your mortgage. Your premiums will be lower than with other life insurance policies, due to the reducing pay-out, but you will still be covered for your family to pay off your mortgage in the event of your death.
You may want to choose to take out an increasing-term life insurance policy. This is where the cover amount increases throughout the term of your policy to reflect market inflation, therefore, the later you pass away within your policy term, the larger the pay-out to your family will be.
You have the option to link your policy directly to a measure of inflation, such as the Retail Prices Index (RPI) or the Consumer Prices Index (CPI), or you can determine a percentage that you want your cover to rise by each year.
It is important to be aware that, as your pay-out is guaranteed to increase, your premiums will also increase through the length of your policy’s term, and so increasing-term life insurance is one of the more expensive types you can choose.
If you want your family to be supported no matter when you die, you should choose Whole-of-Life cover, an ongoing policy that provides a guaranteed payout. Due to this guarantee of pay-out, the premiums for this type of cover are likely to be considerably more expensive than those of term life insurance policies.
Whole-of-Life cover is offered in two different ways:
Balanced cover is where your premiums are guaranteed to stay at the same price no matter how long you have had your policy for, even if your health worsens as you get older. When you die, the life insurance provider will pay out a fixed sum that was agreed upon when you set up your policy.
Maximum cover is where your money is invested by the insurer on your behalf. Each monthly payment is invested to generate a larger return that will hopefully build up to cover the total cost of the pay-out.
Your premiums are reviewed periodically to determine whether your investments are performing well. If they aren’t, it is likely that the insurer will modify your cover either by increasing your premiums, sometimes substantially, or reducing the size of your payout. There is, therefore, some risk to this type of life insurance policy.
Renewable Term Insurance
Renewable term insurance is similar to term life insurance in that it provides life insurance cover for a fixed length of time, however it is able to be extended when the term ends without having to have another medical assessment.
Your premiums will remain at the level of the previous renewable term insurance policy, even if you have developed health problems within the duration of your last policy.
Joint Life Insurance
If you have a partner, spouse, or business partner, you have the option of taking out a joint life insurance policy which will provide a pay-out should one of you die. This type of policy may work out as cheaper than paying for two single policies with their own premiums, but there will only be a pay-out on the first death. The cover will then end, and you will need to take out an individual life insurance policy, which may be more expensive as you will be of an older age. Should a couple die at the same time, the insurer will only issue one pay-out.
The main downside to this type of life insurance is that, if your relationship were to end, the cover cannot be divided into two separate policies so the policy would need to be cancelled completely and individual policies taken out.
Family Income Benefit Insurance
Family Income Benefit Insurance is a special type of decreasing-term insurance. Instead of a lump sum being paid out in the event of your death, it is paid out as an equal monthly income until the policy expires.
You state how much income you want your family to receive and for how long for. Your insurer will then use this information to work out what your premiums will be each month to assure that level of cover.
This is a good option if you want to ensure that your family is supported with a regular income that will be easy to manage and will help to pay any monthly expenses.
Choosing the right life insurance policy for you and your family isn’t always easy, but at Evason Fildes, we work to help you find the best life insurance policy for you at the best possible price. To get started, simply fill out some basic details and get a free review to find out whether your current policy is really right for you and what to do if it isn’t.