Life Insurance

Life insurance does exactly what it says on the tin.  It insures a person’s life, meaning that in the event that they pass away, the policy pays out a lump sum of money.  The policy holder can name beneficiaries that directly benefit in the event of their death. 

People usually take out life insurance because they have other people, either financially linked, or entirely dependent on them.  The policy pays out to ensure that your family or other dependents can still be financially secure after your death and the loss of the income that you provide.

Essentially, you need to ask yourself if your dependents could continue to have a good standard of living without you and the financial support you provide.  If the answer is no, it’s worth looking at the different types of cover that are available.

Different Life Insurance Types

There are a few different types of life insurance policies, they all pay out in the event the policy holder passes away, but what they pay out and how can vary.

Level Term Assurance

This form of cover pays out in the event you pass away.  It covers you for a fixed amount of money (sum assured), for a set period of time and the amount it pays out does not change.

For example: you could arrange a policy to cover you for £500,000 for a period of 30 years.  The policy would pay out £500,000 at any point over the 30 year period of the policy, whether that be year 5 or year 30. Using the same example, after the 30 year term is over, the policy ends and you’re no longer covered.

You choose the amount of cover and how long you would like to be covered for.  It’s a good idea to speak to a financial adviser who can compare different insurance providers from across the market, and help tailor a policy to suit your specifications.  

Decreasing Term Assurance

This is similar to level term assurance in the sense you choose the sum assured and how long the cover lasts for. However, the key difference as the name suggests is that the cover decreases over time.  For example, having £500,000 of cover over a term of 30 years will pay out £500,000 if you passed away at the start of the policy, but after 15 years it may pay out close to £250,000.

The reason this cover is usually put in place is to protect a mortgage debt.  Over time you pay off your mortgage and the balance goes down, this form of cover decreases over time to match this.  It’s therefore a very suitable form of cover for mortgages and is often called “mortgage protection”.

You may be wondering why you would ever pick a type of cover that decreases instead of a sum assured that stays the same. The answer is that it’s slightly cheaper.  Again, if you really want to look at all the options we’d recommend you speak to one of the advisers we work with. 

Family Income Benefit

Family income benefit is still a type of life insurance policy as once again it pays out in the event of the policy holder passing away.  However, instead of paying out a large lump sum all at once, it instead pays out a monthly income.

The idea, as the name suggests, is that the policy provides a replacement for the income lost when someone passes away.  The advantage of this policy over one that pays a lump sum is simply that it can be difficult to make a lump sum last a long period of time.  For example, if you have young children that may need 20 years of financial support, a family income benefit policy is more effective as it’s a guaranteed income that will not run out until the policy ends.  

Once again, you choose the monthly amount of cover that you feel your family would require and the term over which you need cover, for example, until your youngest child reaches 21 years of age.

Whole of Life Insurance

This form of cover pays out in the event the policy holder passes away, but the key difference is there is no set term.  This means that this form of policy is ultimately guaranteed to pay out eventually.  As such, these policies are typically more expensive than term assurance policies.

Additionally, these policies are usually taken out in relation to estate planning in order to pay for an inheritance tax bill.  Although this is a common use for whole of life policies, the funds can once again be used however your beneficiaries choose.