If you want to continue to help your family when you’re no longer around to financially support them you may be considering taking out a life insurance policy.
There are many types of life insurance available so let’s take a look at what’s out there and find out what’s best for you.
What are the different types of life insurance?
Life insurance policies are designed to cover a particular scenario and so thinking about it this way makes it much easier to understand each type of policy.
Let’s say you’re buying or renting a home, or have young children and you want a policy in place to pay off the mortgage or cover the cost of raising your children. Term life insurance covers you for a set period of time which could be the length of your mortgage or until your children are grown.
Or you could be nearing retirement and want to provide for loved ones when you die, and for this there’s over 50 life insurance, sometimes called ‘whole of life’ cover, which is a policy that protects you for as long as you live, rather than a set time.
These are just a couple of examples so let’s look a bit closer at the common types of life insurance.
Term life insurance
It’s the most common type of life insurance and lasts a set number of years, known as the ‘term’. There are three different types and so let’s explain each one.
Decreasing term life cover
You’re most likely to buy decreasing term life insurance when you take out a mortgage, or another loan that you pay off over time . It could help to pay off the balance of a repayment mortgage if you die during the term and is especially common if you’re buying a home with a partner. The policy usually lasts as long as your mortgage and the payout generally reduces in line with your mortgage as you pay it off.
The good news is your monthly premiums (the amount you pay) remains the same throughout the life of your policy, so if you’re paying £12 a month now, you’ll still be paying that at the end of your policy.
Level term life cover
Level term, also known as family protection insurance, is also a term cover product, but the payout doesn’t reduce over time.
You can choose how long you want the policy for and your premiums stay the same as well but you’ll probably pay a little more for level term life insurance.
It’s a great option if you want a lump sum for your loved ones if you die during the policy term.
Increasing term life
This one is a life insurance for a set period, but this time the payout increases during the term.
The cost of living increases over time – known as inflation – which means your money now won’t go as far in the future as prices rise.
With increasing term life insurance your payout increases in line with inflation but it does mean your premiums generally increase as well.
It’s great if you want to provide that little bit of extra protection for loved ones, especially if you have children – the cover could be used to help towards their education, clothes, hobbies etc. as they grow up, following a claim.
Joint life insurance
Joint life insurance is bought to cover you and a partner on one policy. It’s sometimes cheaper than buying two policies and there’s only one premium to pay each month.
You can buy joint life insurance on a level, increasing or decreasing term basis and there’s usually an option to add on critical illness cover too.
How it works is that if one of you dies, a claim is made and the policy will end.
Critical illness cover
You’ve may have heard of critical illness cover which can be bought on its own or at the same time as life insurance. What it does is pay you a lump sum while you’re alive if you become seriously ill with an illness or injury covered by the policy.
It’s more expensive than life insurance but it’s hard to put a value on the peace of mind if you’re unable to work and reliant on your income each month. A lump sum at a challenging time could help take the pressure off paying bills and living costs.
There will a be a list conditions covered - with our Critical Illness Cover it’s 52 conditions - and if you’re diagnosed with any one of them, you’ll receive a payout. Some polices, ours included, cover your children on the policy for no extra cost.
Over 50 life cover
Over 50 life insurance works in the same way as ‘whole of life’ cover, which means your policy covers you for the rest of your life. With our cover, you only pay premiums for a maximum of 30 years, or until the policy anniversary following your 90th birthday.
What you pay each month stays same, and it’s helpful for paying funeral costs or giving family a small windfall when you die.
Income protection cover
Income protection is where you receive a monthly ‘income’ from the policy if you’re ill or injured and unable to work.
If you’re self-employed or would be relying on statutory sick pay then income protection helps guard against financial hardship if you’re not earning an income each month.
How much will I get each month?
It replaces some, but not all of your income, and your benefit will be based on a proportion of your gross annual earnings. In most cases it’s about 65% of the first £60,000 you earn, then 45% over that.
So if you have a gross salary of £20,500, and take home £1500 net, the maximum monthly benefit available to you would be around £1110 per month.
Does it start straight away?
When you take out income protection insurance you’ll need to decide on a deferral period. This is how long you wait between the first day you’re unable to work and the first day your payments begin.
Most providers offer a number of choices here, from 4 – 26 weeks, which you specify when you buy your policy.
You’ll usually pay a cheaper premium if you defer the payment for a longer period so it’s important to think about how long you could manage financially before needing the monthly top up.
What type of life insurance do I need?
It really comes down to your personal circumstances and what you want the cover for. There’s no right or wrong type of life insurance and as we’ve seen, you can have more than one type of policy at the same time.
Take a look at our life insurance calculator too which helps you determine how much life insurance you might need.
One thing is for sure, having the right life insurance cover in place can give you peace of mind that loved ones will be financially supported once you’re no longer around.
