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What are the different types of Life Insurance?

None of us know what’s around the corner – yet there are ways you can prepare for the future.

Have you thought how your family would cope following your death, not just emotionally, but financially?

It’s certainly an uncomfortable issue to think about but ensuring that your family have financial support after you’ve gone is very important, particularly if you have any outstanding finances such as a mortgage or credit card bills.

Life insurance is there to offer you a safety net and offer a substantial payout should you die prematurely whilst you still have debts to settle. Even if you don’t have any outstanding debts, life insurance could provide a lump sum for your dependents in order to maintain or improve their standard of living.

Who benefits from my life insurance?

So you’ve decided that getting some form of life insurance could be a sensible plan for the future but where do you start?

Firstly you’ll need to determine who it is that you need to support and how much you need to cover yourself for.

You can read more about this in our guide: How much life insurance do I need?

The people that you would typically need to protect would include your partner or spouse, your children or any other relative who depends on you financially.

Your life insurance would payout a lump sum upon your death – assuming that it fell within the timescale of your policy – and could be used to cover anything from funeral expenses, outstanding mortgage payments or general living costs.

&Read more about deciding how much cover to get in our guide ‘How Much Life Insurance do I Need?

Are there different types of Life Insurance?

There are two main types of life insurance in the UK – these are term insurance and whole-of-life insurance.

As can be gleamed for the names, term insurance covers you for a set duration during your lifetime, whereas whole-of-life insurance will cover you for your entire life.

Term Insurance

Term insurance is typically the cheapest form of insurance as it only covers you for a fixed period of time. It’s often taken out at the same time as buying a property as it can cover the period of repayment, so you’ll find that most people have term life insurance policies for around 20-30 years or so to match the life of their mortgage.

In the event of your death, you wouldn’t need to worry that the debt would be passed onto your partner or children or that they may be at risk of losing the family home. As long as you have ensured that you have enough cover, life insurance can be used to pay off the entire outstanding balance of the mortgage.

Once the term has expired, this type of policy has no value whatsoever, however by now your mortgage should be paid off in full (if you have a standard repayment mortgage).

Term insurance can be split into different categories:

Level Term

Level term insurance involves a fixed, lump sum payout if the policyholder dies within the time restraints of the policy. You simply need to choose the amount of cover, known as the ‘sum assured’ and the length of policy. If you insure yourself for £200,000 this is the amount that will be paid out in the event of a claim being filed.

Decreasing Term

Decreasing term insurance involves a payout which lessens over the term of the policy. This type of policy is often used to cover mortgages as due to the diminishing nature of the policy it can coincide decreasing amount that will be owed to a mortgage lender over time if you are on a repayment mortgage.

Decreasing term insurance is often the cheapest form of term insurance because although the risk of a payout generally increases overtime due to the age of the policyholder, the actual chance of paying out the maximum amount becomes less over time.

Whole-Of-Life Insurance

Whole-of-life insurance will be in place for the rest of your life, and it guarantees a payout when you die.  It is often known as life assurance, because you are assuring yourself of an eventual payout – something which term insurance cannot offer.

Because of the guaranteed payout, premiums for this type of policy will be much higher than term insurance.

Whole-of-life insurance is often popular with customers over the age of 50. Many insurers will not offer term insurance to those aged 50 and over due to the increased risk of a claim being made, but many whole-of-life policies are based around guaranteed payouts for older people, although it’s worth bearing in mind that the premiums for these can be expensive, yet the payouts are relatively low compared to that of term insurance.

Whole-of-life insurance is often used as a way of paying for funeral expenses – it allows you to make regular payments into a plan, knowing that the payout when you eventually die should be enough to cover this. Anything left over could be left as a gift to your beneficiaries.

Are there alternatives to life insurance?

Critical Illness Cover is generally classed as an alternative option to life insurance but in fact the two cover quite different things so there is no harm in having both in place – in fact many insurers offer critical illness cover as a policy extension to your existing life insurance.

Critical illness cover offers a lump sum payout upon diagnosis of a critical or chronic condition – it does not necessarily need to be terminal.

The payout can help if you are unable to return to work due your condition and is designed to cover the loss of income suffered so that you are able to cover your financial responsibilities.

The payout may also come in useful if you need to pay for care, or your partner needs to give up work to provide care, or there may be circumstances when you need to adapt your home in order to better your standard of living.

Diagnoses that are covered by critical illness insurance can include stroke, heart attack various forms of cancer, loss of limbs etc.  It’s important that you check with your insurer which conditions the policy covers and which are not eligible for a claim.

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