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Types of life insurance

Life insurance is a kind of insurance that pays out if or when you die, depending on the particular kind of policy you take out.

In This Guide:

Life assurance

Interchangeable with whole-of-life¬ cover, life assurance is a kind of policy that pays out when you die, whenever this may be. With this kind of policy, you are assured a pay-out, hence the name.

Whole-of-life cover

See above, whole-of-life cover is kind of life insurance that will pay out in the event of your death, whenever this is. This is as opposed to fixed term insurance, which will be defined below.

Fixed term life insurance

With a fixed term life insurance, your policy will pay out if you die within a period of time set at the opening of the policy. You will not be covered if you should die once the fixed term has run out unless you renew your policy.

Convertible term insurance

Convertible term insurance allows a policy holder to convert a fixed term life insurance policy into a whole-of-life policy if they so choose.

Bear in mind that this conversion will serve to increase the cost of the premium paid on the policy in question.

Decreasing term insurance

Decreasing term insurance is designed to help you pay off any debt that will reduce in size over time like a repayment mortgage. The size of the pay-out will gradually shrink, and the premiums will be lower than they would for a level term insurance policy.

Increasing term insurance

Increasing term insurance is simply the opposite of decreasing term insurance. The sum to be paid out will increase over time, as would the premiums payable.

Increasing term insurance

Level term insurance will pay out a fixed sum at the end of the policy, unlike decreasing or increasing term insurance.

Critical illness cover

Sold either as a standalone policy or as part of a package deal along with fixed term life insurance or some form of income protection insurance, critical illness cover will protect you and pay out in the event that you contract a specified critical illness while the policy is active.

This pay-out will generally take the form of a lump sum, but can sometimes come as a regular income over a set period.

Terminal illness cover

Like critical illness cover, a policy with terminal illness cover will pay out if you are diagnosed with a terminal illness during the term of the policy.

Sometimes insurance providers will only allow terminal illness cover to be active during the final 12-18 months that the policy in question is active.

Income protection

Income protection insurance protects you in the event that you are stricken with any kind of illness or serious injury that stops you from being able to work.

You will be paid out a proportion of your regular salary (generally around 50-70%) until either you return to work, you retire, or the policy reaches an end.

Payment protection insurance

Payment protection insurance (PPI) is a bit like income protection insurance but designed to help you pay off specific debts, rather than just to help with day-to-day expenses.

More specific still is mortgage payment protection insurance (MPPI) which, as the name suggests, is designed to help pay off your mortgage while you are unable to earn.

Trust

A trust is an asset set aside designed to benefit a specified person or group of people such as your children.

It is managed by a trustee until such time as the beneficiary is intended to receive it, say when your children reach the age of 18.

You can place your life insurance policy in a trust and, in doing so, bypass inheritance tax and lengthy probate procedures.

Family income benefit

As with critical illness cover, family income benefits are available either as a standalone policy or as an add-on to a life insurance policy. With this kind of cover, a regular, tax-free income will be paid out to your family if you happen to die during the course of your policy.

Reviewable and guaranteed premiums

Guaranteed premiums remain the same throughout the duration of the policy. Policies with guaranteed premiums are sometimes known as level premium policies.

Reviewable premiums on the other hand are subject to change based on various factors like your changing health or general changes in the insurance market.