A guide to life insurance policy types
Life insurance – also known as ‘life assurance’ or ‘term assurance’ -- offers peace of mind that your family or your partner will be provided for in the event of your death. There are various types of life insurance policies to choose from, however, so in this article we provide you with an introduction to the main types.
This tends to be the most expensive, guaranteeing your dependants a payment regardless of when you die. Premiums are set when you begin the policy, so as long as you keep up payments they should not increase as time goes on. In contrast, other life insurance types known as 'term insurance' (as described below) only pay out if you die before a specified date. These tend to be cheaper and may be adequate if you only need to make sure mortgage repayments can be met (which usually end after 25 years).
Level term insurance
Level term insurance pays out a sum of money if the policyholder dies during the policy’s term. The sum assured is guaranteed and the payout amount is the same throughout the term. Since most mortgages are paid off after 25 years, you may not need life cover beyond this period – and this type of insurance may also appeal to policyholders who only need cover while their children live at home or are in full-time education. Limiting your life insurance policy term in this way reduces premiums compared with whole-of-life policies.
Convertible term insurance
This type of insurance is like level term insurance, but with the option to revert to whole-life insurance.
Decreasing-term life insurance
With this type of life insurance the potential amount paid out decreases each year. It's sometimes referred to as 'mortgage protection cover', because it is often used to protect capital and interest repayments on a mortgage. The model reflects the shrinking size of mortgages over time, and whereas with normal term insurance you could end up being 'over-insured' as time goes on and your mortgage shrinks, decreasing term life insurance takes this into account, and premiums tend to be lower.
Increasing-term insurance on the other hand sees potential payouts increase each year, and may be suitable if you expect your family's financial needs to grow along with increasing inflation. You can link your payout directly to an inflation measure such as the Retail Prices Index (RPI) or Consumer Prices Index (CPI), or cover can rise by a fixed percentage year on year. Expect premiums to be higher than those of Level term or Decreasing-term insurance.
Renewable term insurance
With this type of insurance, cover is provided for a fixed period, but on the expiry date there is an option to continue without undertaking any further health checks. This can help keep premium costs to a minimum in the event of you developing health problems, because while premiums are likely to be based on your age at the renewal stage, they do not reflect any health issues you have experienced since the original policy was taken out.
Joint life insurance
For couples, Joint life insurance is worth considering – a single policy that pays out in the event of either one of you dying. This can work out cheaper than paying the premiums on two separate policies, but remember that with joint policies there is only one pay out on the first death – and after that point the cover ends. If you had two separate individual life insurance policies, on the other hand, the second policy would remain in place even after a claim was made on the first policy.
Some firms offer staff’s families a lump-sum payment if the employee dies while they are employed by the company, regardless of whether the death occurs at the workplace or elsewhere. You may still need separate life insurance even if your company does offer death-in-service benefits, however, as they are often only equivalent to three or four years’ worth of salary – and cover ends if you leave the firm.