Understanding the Different Types of Life Insurance Policies
Choosing your life insurance cover is one of the most important decisions you can make, especially if you have dependants who rely on you. At the heart of it, there are only two types of life insurance: term and whole life. We will look at each one in a little more depth below.
Term Life Insurance
This type of policy has a time frame attached to it, meaning that a payment will be made to your beneficiaries if you die within the specified period, either as a lump sum or monthly instalments. Most term life insurance policies run for between 10 and 25 years, although the exact length will depend on your own needs. This kind of policy is popular because it is the cheapest to buy thanks to its short-term nature, ideal for those who might only want cover whilst their children are financially dependent on them.
The types of term insurance available include:
Level term insurance – which will pay out a set sum to your beneficiaries upon your death, meaning that you know exactly what they will receive as the amount doesn’t change.
Decreasing term insurance – which means that the payout will decrease over the course of your policy period, this is often used by people with mortgages so that the amount decreases in line with the amount still owing on their mortgage.
Increasing term insurance – means that the amount that can be paid out will increase throughout the policy period, in line with current living costs, and is usually fixed at a certain percentage increase each year.
Another type of term life insurance cover is something called family benefit income. This policy provides your remaining spouse and/or children and their guardian with a regular, monthly, tax-free income for the duration of your policy period. Once your policy period has ended, their payments will stop, so it is wise to ensure that your cover will last until your youngest child has reached at least 18 years of age.
Whole Life Insurance
This type of policy has no end date, other than when you die. As long as you keep paying premiums, your beneficiaries will receive a payment upon your death. This kind of cover is more expensive than term life cover, because a payout at the end is certain; it is also designed to help take care of more complex financial matters, such as inheritance tax bills.
Because policy payments are split between paying for your life cover and investment growth, your payments may fluctuate during the life of your policy. Investing some of this money is important for the policy providers because it helps to offset the cost of life insurance as people live longer, if the investment does poorly over a period of time, then the premiums may increase to ensure that you continue to receive the same level of cover.