Different types of life insurance policy
Life insurance allows people to take ease in the knowledge that their dependents will be financially supported in the case of their death.
There are a huge variety of life insurance policies that one can take out and trying to choose between them can often be overwhelming. Everybody's needs are different so it is important to understand how the different types of cover work before you compare life insurance policies and decide on one for yourself.
In This Guide:
- "term" and "whole of life" insurance
- Different types of term insurance
- Joint life insurance
- Family income benefit
- Whole of life insurance
- Reviewable policies
- Over-50 plans
- Endowment policies
"term" and "whole of life" insurance
The two core forms of life insurance are "term" insurance and "whole of life" insurance.
Term insurance is the most commonly chosen type of insurance. This type of insurance will cover you for an agreed upon amount of time, after this time the policy simply stops and you receive no payment.
Whole of life insurance can also be referred to as whole of life assurance. If you take out this type of policy, you are assured of a payment at some point. As the name suggests, whole of life insurance covers you no matter when you die. The price for this type of insurance is normally higher than it would be for term cover.
Different types of term insurance
There are a few different types of term insurance available and each has its own positives and its own set of drawbacks:
Level Term Insurance
Level term insurance will give your dependents one predetermined lump sum if you pass away during the agreed upon term. This amount does not change over time and stays the same throughout the entire length of the policy. This type of insurance is called "level term insurance" because the amount stays at the same level throughout.
Increasing Term Insurance
There are plenty of people who want an insurance policy that will not lose value over time due to rising levels of inflation. If you are one of those people, then you may want to consider signing up to an increasing term insurance plan. These types of plan are either tied to inflation to make sure that the real term value of the sum stays the same no matter the economical climate, or they increase by a fixed amount each year.
With these types of policies the sum total paid out increases each year but the premiums do so too, therefore it is important to be aware that the cost of this insurance will go up each year.
Decreasing Term Insurance
Decreasing term insurance is best for people who want their life insurance plan to be able to pay off an existing debt that will be decreasing over time. Debts like mortgages can be a huge burden for the dependents of those who took them out, should the borrower pass away.
If you decide to take out this form of insurance, the payout will decrease over time so the premiums will be lower than for other types of life insurance.
Convertible Term Insurance
This form of life insurance is known as convertible term insurance. This name is given to term life insurance policies that allow its holder to change it to a whole of life policy if they so wish. Once you have taken out a convertible term insurance policy, you are entitled to change the length of your plan at any point - regardless of any change to your health or circumstances.
It is important to remember that even though you have the right to change your policy at any time, the premiums that you pay will probably go up. This is because by changing your policy to a whole of life plan, you are guaranteeing a payout on the plan at some point.
Renewable Term Insurance
This type of insurance is known as renewable term life insurance. This refers to policies that allow the plan holder to renew their deal when the agreed term runs out. This means that the person being insured does not need to undergo a health review. There is however the possibility that the price of the plan may change over time so it is worth bearing this in mind when taking it out this form of policy.
Index-Linked Term Insurance
This type of insurance has its price linked to the Retail Prices Index measurement of inflation. By taking out an index linked life insurance policy you can rest assured that your policy payout will not be lessened over time by the real price increases of daily living.
Joint life insurance
The name "joint life insurance" applies to insurance policies that cover more than one person. This type of life insurance is typically taken out by those who have close financial ties to a spouse or partner and who wish to take out one policy between them, as opposed to two separate ones. These types of policy will often have lower prices but this is because they only pay out once.
Joint life insurance policies operate on a "first death basis". This means that whichever of the two policy holders lives dies first will be paid out for. The sum of money goes to the second of the two and at that point the policy ends. Once this policy has ended, the second holder will have to take out a new one if they want to remain insured.
It is important to remember that if you want to take out a new policy after your initial one has ended, then your premiums may be much higher as you are likely to be a lot older.
Family income benefit
This type of life insurance policy pays out its sum in the form of an income, instead of as one lump payment. This form of policy is normally cheaper than other forms of term life insurance. The reason for this is that the insurer will end up paying out less than they would on other policy types.
Whole of life insurance
Whole of life insurance can also be referred to as life assurance. The reason for this is that when you take out this form of policy, you are guaranteed to receive a payout. Unlike like term insurance, whole of life insurance will cover you from the start of the policy until the end of your life.
Most policies of this form are split into two parts when it comes to payment. The premium is divided between the amount you spend on cover and the an amount that you invest. The reason for the investment is that this is intended to cover the cost of your insurance plan as you grow older and the premium gets higher as a result.
The downside of this is that if the investment does not grow as much as you had hoped, you may end up paying more on premiums anyway to cover the shortfall in the investment.
Non-Profit Whole of Life Insurance
These types of policy are like term insurance policies in the way that there is no investment that goes alongside the payment for cover. Premiums do not change and a cash sum is paid when the holder dies.
Low Cost Whole of Life Policies
This is the same as a standard whole of life policy that will payout the higher total of either guaranteed death sum or the worth of the policy.
These types of policy can be looked into after ten years by your insurer. The company can then decide to raise the cost of the premiums if they judge the circumstances to have changed significantly.
Some of the factors that could lead your insurance company to change the rate of your premiums are your health, life expectancy and your lifestyle.
Life insurance for over 50s will generally have a much lower payout due to the increased age of the policy holders. People normally take out these policies in order to cover funeral costs. The prices of these plans are normally fixed and the payouts will fall somewhere between £500-£2,000.
It is important to be aware that if you take out his type of policy you will probably end up paying more for the policy than you will receive in a payment.
These plans are basically investment plans that come with life insurance included. They were once popular with people that were trying to pay an interest only mortgage. These policies are not as popular now because many of them have underperformed and left the holders short of money.