When thinking about which type of life insurance will best suit you and your family, you need to consider what you want to get out of it. For example, if you have young children then you may want a policy that can cover your income until they’re 18. Or maybe you just want to make sure they’re not burdened by your mortgage or any other debts you may have.
The types of life insurance that will be most beneficial to families include:
Level term life insurance
This is one of the simplest types of life insurance, in which you agree to a fixed sum that your insurer will pay to your beneficiaries should you die within the pre-agreed term. The payout can either be paid as a lump sum or in instalments, also known as family income benefit.
Decreasing term life insurance
This works similarly to level term life insurance, with the only difference being that the total payout decreases the longer you are into your policy. These types of policy are typically taken out by people with outstanding mortgage payments or other forms of debt.
Whole of life insurance
This is one of the safest types of life insurance in that you are almost guaranteed a payout, although this type of cover is typically the most expensive. Whole of life insurance policies don’t have a term or end date, meaning they’ll pay out whenever you die should your claim be valid.
Joint life insurance
Couples often choose to open a joint life insurance policy that will cover both parties with a single pay out when the first partner dies. Such policies are often cheaper than taking out separate policies, but remember that your cover will end once one of the policyholders die, meaning you may have to get more insurance later on down the line.
Critical illness and terminal illness cover
Both critical illness and terminal illness cover are available as independent products or as add-ons to other family life insurance policies. They are similar in that both will pay out in the event that you contract a particular illness, or one of a list of particular illnesses, and are therefore no longer able to work and earn.
This type of cover, also known as income protection, can be particularly helpful if you are the main household earner and will help your family pay for any outstanding debts, keep up with day-to-day household expenses, and pay for any medical costs incurred as a result of your illness.
Writing a life insurance policy in trust
Another option if you want to maximise the benefits received by your children when you die is to put your life insurance pay-out in a trust. The money will remain in the trust, to be looked after by a trustee, until such time as the beneficiary (or beneficiaries) reaches a pre-determined age, usually 18 or 21.
One of the main benefits of doing this is that because the money goes directly into the trust on behalf of the beneficiary, it does not go into your legal estate and so does not count towards the inheritance tax threshold. Anything above the inheritance tax threshold of £325,000 will be taxed at 40% and so by writing your life insurance policy in trust, you could save your family a lot of money should the worst happen.