Once you’ve taken the decision to provide some form of security and peace of mind for your loved ones in the event of your death, the next step is to decide what kind of life assurance is appropriate for your and their needs. Is the insurance intended to provide cover for the remainder of your life – a whole life or permanent life insurance (also known as an investment life assurance) – or is it, instead, cover for a particular purpose, to meet specific needs during a known period of time – term life insurance?
If it’s the latter, there will be two principal types of life assurance from which to choose, and are both very different in the way they are calculated.
Decreasing term life assurance
As the title implies, this form of life assurance provides cover for a specified period of time (the fixed term), but the amount paid out under the policy decreases during the course of its term. This is the type of insurance generally used to cover the outstanding amount of a mortgage at the time of your death. The sum that would be paid out, therefore, decreases over time, since the outstanding amount on the mortgage also decreases. If you survive the term of the life assurance policy, then the payout sum will be zero.
Many mortgage lenders require their borrowers to take out life insurance – and a decreasing term life assurance is generally appropriate – in order to guarantee repayment of the mortgage loan should the mortgagee die before it reaches full term.
Fixed term life assurance
This is probably the simplest and most straight forward of the life assurance packages you will be offered. As this title also implies, the cover is again for a specified number of years, during which a lump sum is paid in the event of the policy holder’s death. However, if the policy holder continues to live beyond the fixed term of the insurance, then no payment is made on his eventual death – the lump sum is only payable if the policy holder expires before the fixed term of the policy does.
With fixed term life assurance policies, the option is usually offered – through payment of an additional premium – to insure you in the event of a critical or terminal illness being diagnosed.
Whether or not such an option is taken up, the cost of fixed term life assurance policies will depend on your particular, personal circumstances – notably, your age, your health and your occupation – and of course the term for which cover will be extended. In any event, it is very important to remember that life assurance cover is in place only so long as you maintain the monthly premium payments. If you default on these, then cover no longer applies.
Indeed, you should take the time and effort to acquaint yourself with all the terms and conditions relating to any life assurance payout. This is what you are buying, after all. Some policies, for example, include in their specified exclusions payouts following deaths caused by participation in particular dangerous sports or activities.
Similarly, if you have life assurance included in an occupational pension scheme, you should check whether that life assurance is maintained if you choose to leave that particular employment.
Whatever life assurance you are considering purchasing, it is as well to bear in mind that the longer you delay, the more expensive the premiums will become. You an change your life insurance policy at any time by speaking to your provider.
Things to remember about the policy you choose
- Decreasing term life assurance provides a diminishing-value lump sum payment during the term of the policy. It’s most often used for mortgage protection.
- The fixed term insurance, however, guarantees payment of an agreed lump sum payment if the policy holder dies at any time within the policy term