At its most basic, life insurance is designed to pay out a sum of money after you die. This ensures that your dependents are able to keep up with bill payments, maintain their standard of living and pay for funeral costs after you’ve gone.
One of the most common types of cover for this is a policy that pays out if you die within a fixed period of time. This is known as term life insurance.
If you die after this pre-agreed time-frame (called a term), you will not receive a payout.
For this reason, term life policies tend to have lower premiums than those that cover you for the whole of your life.
Those looking to protect their family’s finances by covering living expenses or replacing lost income may opt for a level term life insurance policy.
Decreasing Term Life Insurance
If you’re looking for something specifically to cover your mortgage (which is possibly the largest of your outstanding debts), you might be interested in a decreasing term policy. This is more commonly known as mortgage life insurance.
Mortgage life insurance is commonly used to cover the outstanding balance of a repayment mortgage.
As you make more repayments to your mortgage, the overall level of debt decreases over time. As such, the level of cover you’ll need also decreases. With mortgage life cover, the amount you’re covered for decreases over the term of the policy.
So if you died two years after buying the policy, your payout would be higher than if you died 20 years afterwards.
Whole of Life Insurance
Whole-of-life insurance is designed to last as long as you do. You pay in a premium every month and when you die, the policy pays out a lump sum to your loved ones.
That sounds simple enough, and a valuable benefit to have. Yet only a small minority of people take out whole-of-life cover – the vast majority opt for term insurance instead
Critical Illness Insurance
Critical illness cover pays a tax-free lump sum if you’re diagnosed with a critical illness during the policy term.
Provided you keep paying your premiums, you should be covered throughout the term. Once the policy term ends, all protection stops.
When you take out a policy you can decide how long it will last e.g. until your children have grown up, or until the mortgage is paid off. You can even set it to run for the rest of your life.
You can also usually choose the payout amount, with higher premiums payable for higher amounts.
Critical illness cover is often available as an add-on with a life insurance policy. In these instances, you can often only claim once.
For example, if you get a cash payout after being diagnosed with cancer, the policy is effectively finished. There is usually no life insurance payout if you die at a later date.
Alternatively, you may wish to have your potential payouts rise every year, perhaps to reflect increasing inflation. With an index-linked policy you can choose to link your payout directly to an inflation measure such as the Retail Prices Index (RPI) or Consumer Prices Index (CPI), or you can simply arrange for the extent of cover to rise by a fixed percentage every year. If the cover is scheduled to rise every year, your premiums will be higher than for level-term and decreasing-term insurance.
Renewable term insurance
This is a policy that provides cover for a fixed period, but which can be extended when that period comes to an end without you having to undergo further medical checks. The premiums may increase based on your age at this point, but if you have suffered any health problems since the original policy was taken out, these will not be taken into account or reflected in the new cost of the policy.
Joint life insurance
If you are part of a couple, you could consider taking out a single policy that will pay out in the event of one of you dying. This can be cheaper than paying the premiums on two separate policies, but bear in mind that joint policies only pay out on the first death – after that the cover ends. If you had two separate policies, the second policy would remain in force even after a claim had been made on the first.