Life insurance is something that most people don’t like to think about as it means considering what life could be like for your loved ones when you are no longer around.
However, even though it’s perhaps not the easiest though to consider, it’s important that you make sure your loved ones have the protection they need, should the worst happen.
But it’s not as simple as just picking a policy up off the shelf; there’s a wide range of different types to select from. If you don’t know your renewable convertible term from your whole of life, this guide will give you a hand in deciphering the insurance maze.
This is the cheapest and most common type of life insurance and is widely available both online and from independent financial advisors.
Usually a no-frills type of cover, term insurance provides protection for a specified number of years. This is decided by the individual when the policy is taken out.
The insurance lasts for as long as the term selected, often five, 10 or 20 years. After this time, the cover runs out.
Term policies are particularly good for covering the cost of finance, such as a mortgage, where life cover is needed for a specific number of years.
However, there are several different types of term insurance, some of which make them more suitable for protecting family finances.
Renewable term policies offer the opportunity to continue the insurance without any breaks in cover when the expiry date is approaching. The advantage of this is that no health declarations and checks are required; the only change is a recalculation of the premium based on the individual’s age at the start of the new policy.
These types of policy often have no limit on the number of times they can be renewed, making them an economical way to obtain long term cover. However, many companies do have a maximum age at the start of the policy which means that if you are already older, you will not be able to renew.
A solution to this is another type of policy known as convertible term policy. This allows the individual to choose to upgrade the policy into a whole of life plan (see below) at any given time during the term. Many insurers offer a combination of the two â€“ renewable convertible term policies â€“ which provide the option to either simply renew or convert.
Decreasing term insurance means that the amount payable decreases over the course of the policy. This might sound like a crazy idea â€“ getting less out the more you pay in â€“ but the cost is very carefully calculated at the outset to make sure you are paying an appropriate premium. This type of cover is intended to protect a mortgage or loan, where the balance gradually decreases. The amount of insurance mimics the amount of debt and tracks your balance until it is repaid. At this point the policy matures.
Whole of life
A more expensive way to obtain insurance initially, whole of life offers a very different approach to providing protection.
With no expiry date, a whole of life policy will remain in force, which means that providing you continue to pay any premiums, your family are guaranteed to receive a payout.
It is set up in a very different way to term insurance and there is generally more flexibility about how much you want to pay.
In whole of life cover, your premiums are invested and over time the policy acquires a value. This value helps to offset the policy charges and in later years when cover is more expensive, provides a buffer against the need to increase the premium. Some companies even offer a type of whole of life insurance where after a certain age no premiums need to be repaid because the investment value supports the cost.
However, it is not as simple as this as in order to reach this point, the insurer regularly carries out reviews of the premium to see if your policy is on track to perform as well as it should be. If the investment value has not reached the expected level, you will be asked to either increase your premium or reduce the level of your cover. If you refuse to do either, your policy will eventually become invalid, even though you are continuing to pay premiums confusing!
You can opt to either set your policy up with a premium based on either Maximum or Standard cover. The former means that almost all of the premium will be used to pay for the cover and very little will be invested. This usually works out significantly cheaper to start with but there could be hefty increases in the premium later on. Standard cover â€“ often referred to as balanced â€“ tries to ensure than no premium increases will be necessary throughout the policy life. This is not guaranteed but any hikes will be much rarer and smaller.
Family Income Benefit
If your sole desire is to protect your family, you might prefer for them to receive an income rather than a lump sum in the event of your death.
One way to achieve this is by taking out a type of insurance known as family income benefit. This is usually offered as a variant on term insurance but rather than paying out the sum assured as a lump sum, the family receive the money in pre-determined instalments, spread out over the duration of the policy term.
There are many different types of life insurance and you may be undecided about whether to go for one which costs more but provides peace of mind or whether to budget now with the intention of upgrading later. You can use an online comparison tool to get a good idea of the relative costs which might help give you an idea of the differences; you can also find the insurer offering the best deal too.
Many people put off taking out life insurance because of the cost but there are so many options it’s possible to find cover which not only suits your pocket, but also matches the needs of you and your loved ones.