Types of Life Insurance and things to consideredit
Life insurance is the most popular type of personal protection insurance with around 20 million households having some level of cover in place. As the name suggests, it is insurance that is designed to pay out if the person covered passes away, although most policies now would also pay out upon diagnosis of a terminal illness (with less than 12 months to live.)
Whilst they all insure the same risk, the market can be complex with different types of policies available, and we would always recommend that our customers take financial advice from a well-qualified whole of market broker.
The different types of life insurance available to the personal market include:
- Decreasing term insurance – this is life cover where the initial sum insured reduces over the term to nil. It is great if you are looking to insure the debt on a repayment mortgage where the amount you owe goes down over time. Some policies will include a mortgage guarantee to ensure that you always have enough to pay off your mortgage should the worst occur.
- Level term insurance – with this type of policy the sum you are insured for does not reduce over time- it remains the same. It can be used to cover an interest only mortgage, or simply to give you clarity that you always know exactly what amount you are insured for and that it has not reduced to a lower sum.
- RPI linked level term insurance – as above, but with the in-built link to inflation; this will make sure that the spending power of your insurance is not eroded over time.
- Family income benefit – this is a popular option for households with dependent children. Normally written upon a joint basis for both parents, if one of them were to pass away then the survivor will benefit from a set monthly income until the children reach an age at which they are financially independent. Having a regular income can make a huge difference to a bereaved parent, allowing them to perhaps make a change to their working hours to care for the children, or potentially to cover childcare costs or simply replace the income that has been lost to the household.
- Whole of life insurance – unlike all the above policies, which are ‘term insurance’- meaning that they have an end date- whole of life insurance does not have an end date to the cover. So long as premiums are maintained you can rest assured that you will always have life cover in place. These plans can be much more expensive than term insurance, as they will obviously definitely pay out at some point in time. This type of cover is useful for people who want to make sure they definitely will have a policy that leaves a lump sum to their beneficiaries. People who have an inheritance tax liability that they wish to mitigate will also very often use whole of life insurance to cover any future tax bill.
- Funeral plans (over 50s) – similar to whole of life cover, over 50s funeral plans have long been a popular option for those who wish to have a policy in place that will run as long as they do and as such definitely pay out. Originally intended to provide a lump sum towards funeral costs, the monies can in fact be left to your beneficiaries for any purpose at all, but typically the insurers do not offer policies that cover very large amounts. Unlike most other life insurance policies, funeral plans do not typically require any medical questions and will insure anybody, irrespective of their health, subject to paying a minimum term of premiums before the cover is fully live. As a consequence, this cover can at times be expensive compared with some of the other options available.
With all of these policies, writing the cover into trust and getting this done correctly is especially important. A trust will ensure that any pay out goes to the individuals that you wished to benefit, quickly and without being subject to any probate delays or taxation.
There are dozens of insurers offering all these types of common cover and more, all priced differently and all responding to client’s medical histories in different ways. Taking financial advice from a specialist broker who can access the whole of market will help you find the most suitable and cost-effective type of cover for your own scenario.