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A life insurance policy can help ensure your loved ones will be left financially secure should you die.
It could be used to pay off debts like your mortgage or simply replace lost income that your family relies on you for.
Choosing a life insurance policy may seem confusing at first because there are a few types available, and they work in slightly different ways.
Read on to discover which kind of policy might be right for you.
There are three main types of life insurance policy:
With this type of policy, you decide how long you want to be covered for (the term) and the payout amount your dependants will receive should you die during the term. For example, if you opt to get insurance for the amount of £50,000 for 20 years and you die during that time, your beneficiaries will receive the full payout. If you’re still alive at the end of the policy term, no payout is made.
The payout decreases over the term of your policy. It’s sometimes called mortgage life insurance because it’s designed to cover a debt that reduces with time, like a repayment mortgage.
As the amount you owe on your mortgage decreases over time, the payout amount decreases in line with this too.
For example, you might take out life cover for £300,000 to cover the cost of a repayment mortgage. After five years, the total amount you owe on your mortgage may have reduced to £240,000. So, the insurance payout would decrease roughly in line with this.
Premiums for this type of cover tend to be less expensive than for level term cover because the payout decreases with time. Again, your family will only get a payout if you die within the policy term.
This type of cover has no fixed term because it covers you for life. As such, it’s guaranteed to pay out a lump sum when you die (as long as you’ve kept up your monthly payments). This type of policy is usually the most expensive life insurance option.
Other specialist options include:
Joint life insurance is usually best suited to married couples and long-term partners. It pays out when one of the two people on the policy dies. After that, the policy automatically ends and there’s no further life cover for the surviving person. Joint life insurance tends to work out cheaper than taking out two separate single life policies.
Family income benefit pays your dependants a regular, tax-free monthly or annual income to replace your own income should you die during the term of the policy. It offers a decreasing level of cover. So, for example, if you take out a 20 year policy and you die 15 years into the term, the payouts would only be made for the remaining five years of the policy.
With an over 50s life insurance policy, there are no medical checks and you’re guaranteed to be accepted if you’re between 50 and 80 years of age. It can therefore be a good option for people who’ve had poor health. Full cover usually kicks in after 12 -24 months after the policy starts. Generally, people buy this type of policy to cover funeral costs or simply to leave money to family as a gift.
Some employers offer death in service cover as a company benefit, paying out a lump sum to your dependants should you die while working for the company. Your death doesn’t need to be related to your work and the payout is tax-free.
Most death in service benefits pay out between two and four times your annual salary. The benefit ends if you leave the job.
You can take critical illness cover out alongside a life insurance policy or on its own. It pays out either a lump sum or monthly installments if you’re diagnosed with a serious illness (that’s covered in the terms and conditions) during the term of your policy. Typically, the money can be used to pay for health-related costs or lost income if you can’t work because of your illness.
As with any type of insurance, it depends on your circumstances.
Start by looking at what money you owe (such as your mortgage), your regular outgoings, plus future possible outgoings (such as university costs for your children). Then consider how your family would be affected financially if you were no longer around.
This should give you an idea of how much life cover you need and how long for.
If you’re only concerned about being covered for a set number of years - while you pay off your mortgage and your family is financially dependent on you, for example - then level or decreasing term life insurance could be right for you.
If you want a guaranteed payout when you die, no matter when that may be, then a whole of life policy might suit you better. Some people take out this type of policy ‘in trust’. This means that the payout won’t be subject to inheritance tax.
Try our life insurance calculator to find the right level of cover for you.
Again, it depends on your circumstances. If you only want cover to last until you pay off your mortgage, or until your children have finished their education, you can choose the length of your policy to suit.
Yes, you’re allowed to have more than one policy. But if your needs have changed since you took out a life policy, it might work out better if you adapt your existing policy rather than take out a second.
Not sure how much life insurance you need? Head over to our life insurance calculator to find out.
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