If you want to take out insurance to ensure your partner or family is provided for in the event of your death, there are a number of types of life-insurance policy to choose from.
These are the options:
As the name suggests, this type of policy will guarantee your dependants a payment irrespective of when you die. Other types of cover (see below) will only pay out if you die before a specified date.
This can be appropriate, for example, if the insurance is only needed to ensure mortgage payments – which end after 25 years typically – are met. Because whole-of-life policies are guaranteed to pay out at some point in the future, it will generally cost more than other types of cover. If you are looking for cheap life insurance, you may be better off considering term insurance.
The premiums on whole-of-life cover are set when you start the policy, and provided you keep paying them, they should not increase at a later date.
Term assurance, or term life insurance as it is also known, guarantees your family a payment if you die within a specific time period. People often take out life insurance because they want their dependants to be able to cover housing costs, for example, if the worst happens.
But given that the typical mortgage is paid off after 25 years, it may not be necessary to extend life cover beyond this. Equally, policyholders may want to be covered only while their children are living at home or in full-time education. Limiting the life insurance policy term in this way means that premiums will be lower than with whole-of-life cover. This type of cover can also be called level-term assurance or insurance if the payout would be the same no matter when the policyholder died during the term.
Decreasing-term insurance (also known as mortgage life insurance)
An option for those buying term life insurance is to have the potential payout fall year after year. This is most commonly to reflect the fact that mortgage debts are likely to be falling as more is paid off. For example, you could take out a 25-year life insurance policy to cover £150,000 – the same amount as you have borrowed on a 25-year mortgage – in the event of your death.
However, after 15 years, for example, the mortgage is likely to have shrunk considerably so you could find yourself “over-insured” and paying more than is necessary in premiums as a result. Decreasing-term insurance deals with this issue and, as you would expect, premiums will be lower than with normal term insurance.
Alternatively, you may wish to have your potential payouts rise every year, perhaps to reflect increasing inflation. With an index-linked policy you can choose to link your payout directly to an inflation measure such as the Retail Prices Index (RPI) or Consumer Prices Index (CPI), or you can simply arrange for the extent of cover to rise by a fixed percentage every year. If the cover is scheduled to rise every year, your premiums will be higher than for level-term and decreasing-term insurance.
Renewable term insurance
This is a policy that provides cover for a fixed period, but which can be extended when that period comes to an end without you having to undergo further medical checks. The premiums may increase based on your age at this point, but if you have suffered any health problems since the original policy was taken out, these will not be taken into account or reflected in the new cost of the policy.
Joint life insurance
If you are part of a couple, you could consider taking out a single policy that will pay out in the event of one of you dying. This can be cheaper than paying the premiums on two separate policies, but bear in mind that joint policies only pay out on the first death – after that the cover ends. If you had two separate policies, the second policy would remain in force even after a claim had been made on the first.
Many companies offer their staff’s families a lump-sum payment if the employee dies while they are employed by the firm (althought this doesn’t mean the death has to be at the workplace or in any way related to the job done). And members of company pension schemes may also be entitled to payments from the pension if they die before they retire.
It is worth bearing these benefits in mind when you consider life insurance, but generally speaking, death-in-service payments are equal to three or four years’ salary and may not provide all the cover you and your family need. And remember, this cover may end as soon as you leave the company.