Taking out life insurance helps your loved ones to be looked after financially if you die, or are diagnosed with a terminal illness, and there are several types of policy to choose from.
Life insurance pays out tax-free money to your loved ones when you die. To suit different needs, policies vary in how much they’ll payout and the period you’ll be covered for.
Generally, there are two main types of life insurance:
With this type of policy, you choose the term - for example, to last the length of your mortgage or while your children are in full-time education - as well as the payout amount.
If you die during your policy’s term, your loved ones will receive a lump sum. This amount stays the same at whatever stage a claim is made during the term.
As the name suggests, this type of policy will pay out whenever you die, as long as you’ve kept up with your premium payments.
Because there’s a guaranteed payout when you die, whole of life policies are usually more expensive than term assurance policies.
There are a few questions you need to ask yourself, to help you find the right policy.
The first of these is to decide how long you want to be insured for, as different types of policies suit different timeframes:
If you want the reassurance that your family and loved ones will receive a payout no matter when you die, you’ll need to take out whole of life insurance.
With whole of life balanced cover, the premiums you pay and the payout your loved ones will receive stay the same.
Or you can choose maximum cover, which includes an investment element, where some of your money is put into an investment fund.
If your investments do well, this can add to the lump sum payout. But if they under perform your whole of life premiums may be increased to make up the shortfall.
For people with large debts to pay off over time, like mortgages, decreasing term policies can be a good option.
With this type of cover, the amount of payout your family would receive reduces in line with how much is needed to pay off your outstanding mortgage.
Even if you pay off your mortgage early, and you die afterwards but before your policy term ends, your cover will still pay out the money as stated in your policy document.
If you want to take out cover when you’re older, you can buy a particular type of life cover called over-50s life insurance.
These policies are specifically designed to meet the needs of people aged between 50 and 80. What’s more, they don’t require any medical checks when you take out the policy.
This cover will pay out a fixed lump sum when you die and can help to cover your funeral costs and other bills your family may have to pay.
When you’re taking out your life insurance policy, you’ll need to decide the best way for your loved ones to receive the payout, if you should die during the term.
Depending on the type of cover you take out, you can choose whether your beneficiaries receive a lump sum or will be paid a regular income until the policy’s expiry date.
The different payout methods offer different benefits, so you’ll need to decide which option will work best for your family.
Receiving a lump sum will give your beneficiaries full control over the money and can provide some flexibility. But receiving such a large sum might be overwhelming.
Alternatively, regular payments can help your loved ones to budget. It can also help the money to last longer, by preventing it from being spent too quickly.
Typically, the younger your beneficiaries are, the more useful receiving a lump sum will be - providing flexibility as their financial needs change over time.
Many life insurance policies include terminal illness cover, which could pay out if you’re diagnosed with a terminal illness during your policy’s term.
For serious health conditions that aren’t terminal, but may prevent you from working or paying your mortgage, you can help minimise the financial impact by taking out critical illness cover.
This will cover you if you’re diagnosed with specific illnesses set out in your policy.
Critical illness cover can be bought as an add-on to your life insurance, or as a stand alone policy to run alongside your life cover.
It’s worth reviewing your life insurance regularly in case you need to update your cover.
For example, your family may increase in number or you might move to somewhere with a larger mortgage that needs to be covered.
You may even pay off your mortgage early and choose to decrease the value of your policy.
If you need to alter your life insurance amount, or change the terms of your policy, you can either arrange this with your existing provider or buy additional life insurance.
It’s also possible to switch insurance providers to find a better deal.
If you want help in deciding what cover you need and how much life insurance might be right for you, try using our life insurance calculator.