Life insurance explained

None of us like to think about our own death, let alone plan for it, which is why life insurance can be a difficult concept to comprehend. It is, however, the best way of ensuring that our loved ones and dependents have some financial security when we die; protecting them from financial hardship and providing them with valuable peace of mind.

What’s the difference between ‘life insurance’ and ‘life assurance’?

There’s no difference other than in the name. Although ‘life insurance’ is the more popular term, 'life assurance' is considered the more correct because unlike ‘insurance’ which provides cover for an event that might happen, ‘assurance’ provides cover for an event that will definitely happen, in this case death.

What types of life insurance are available?

There are several types of life insurance policies available, including:

Level term insurance 
Level term insurance provides basic cover for a set number of years, requiring premiums to be paid regularly (either annually or monthly) and in return paying out a sum of money (the ‘sum assured’) on the policyholder’s death. With level term insurance the sum assured is guaranteed and remains the same for the duration of the policy, however if the policy expires and the policyholder is still alive then no payout is made.

Decreasing term insurance 
Often referred to as ‘mortgage life insurance’ decreasing term insurance is so called because the sum assured decreases over the term of the policy. It is often used to cover a mortgage, with the sum assured decreasing at the same rate as the outstanding mortgage balance. As with level term insurance, if the policy expires and the policyholder is still alive then no payment is made. This is usually the cheapest form of life insurance available.

Increasing term insurance 
With this type of life insurance the sum assured increases gradually over the policy term, often by a set percentage or linked to recognised indices e.g. the Retail Price Index.

Whole-of-life insurance 
This type of policy guarantees a payout when the policyholder dies providing that the premiums are maintained and the policy remains active. The premiums and sum assured are normally guaranteed not to increase for the first ten years of the policy.

Family income benefit 
Rather than receiving a lump sum when you die, your family will receive regular payments over a set period of time. The term over which the benefit is paid is agreed at the policy outset.

Endowment life insurance 
This is the equivalent of a savings scheme with life insurance attached. This type of policy is usually linked to a mortgage, with returns paid out at the end of the policy term; if the policyholder dies before the term expires then normally a lump sum will be paid plus any returns accumulated so far.

Renewable term insurance 
This is a term insurance policy that can be renewed at the end of the term without having to undergo a new medical assessment. Your new premiums will be based on your age at the time of renewing the policy.

Convertible term insurance 
This is term insurance that provides the option to convert the policy to a whole-of-life or endowment policy at the end of the term without providing further medical evidence. The premiums charged for convertible term insurance will be slightly higher than for level term insurance to allow for the cost of the conversion option.

Over 50s lifelong protection

Designed specifically for people aged 50-80 this type of cover differs from other types of life insurance because there are no medical questions asked and no assessment of an applicant’s medical health or history is made. This means that everyone is guaranteed to be accepted. Over 50s cover offers a fixed premium which usually stops at age 85 or 90 but the cover will continue for the policyholder’s entire lifetime. Policyholders can choose to leave a cash lump sum for their loved ones or dependents when they’re gone, or put the lump sum towards debts or funeral costs. Over 50s plans have a qualifying period of normally 12 or 24 months during which, if the policy holder dies, the policy will only return the premiums, and not the 'benefit' amount.

What additional cover options are available?

When you take out a life insurance policy you’ll have the option of taking out additional cover for an extra cost, including:

Critical illness cover 
Critical illness cover pays a lump sum on conclusive diagnosis of a critical illness, including debilitating but not necessarily terminal conditions such as heart attack, stroke, cancer, etc. 

Critical illness policies are very specific as to the conditions they will pay out for, with different levels of cover available. 

Remember!  Failure to disclose all medical conditions and previous medical history could invalidate your claim.

Waiver of premiums 
Waiver of premiums provides a means of insuring your life insurance monthly premiums in the event that you are unable to work due to ill health. Payments are made either until the end of the policy term, until you reach a specified age or you are able to return to work. 

In the next part of our guide we explain how life insurance companies calculate how much you pay.

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How life insurance companies calculate how much you pay »