Life insurance can seem daunting with its various types and terminologies. Understand the different types of life insurance so you can make an informed decision that best suits your needs.
Term life insurance
Term life insurance provides coverage for a specified period or ‘term’. If you pass away during this term, the policy pays out a predetermined amount to your beneficiaries.
There are several types of term life insurance:
Decreasing life insurance
Also known as mortgage life insurance, the coverage amount decreases over time, in line with a repayment mortgage.
This type of life insurance is often chosen to cover mortgage debts, ensuring that the mortgage gets paid off if the policyholder passes away during the term.
Level Term life insurance
The coverage amount remains constant throughout the policy term.
Increasing term life insurance
With increasing term life coverage, your coverage amount increases over time, typically to keep pace with inflation. Premiums are generally higher and are reviewed annually or at set intervals.
Whole of life insurance
Whole of life insurance provides life insurance coverage for your entire lifetime.
Whole of life insurance differs from term life insurance means that a payout is guaranteed whenever you pass away as long as your policy is active and you have paid your premiums.
As this policy provides lifelong coverage, premiums for whole of life insurance are typically higher than term life insurance.
Over 50s Policy
An “Over 50s” policy is tailored for those entering their golden years and ensures that children or grandchildren have something set aside for them.
This type of life insurance doesn’t usually require a medical examination and offers coverage for the policyholder’s lifetime.
What do I need to consider when choosing life insurance?
Your choice of life insurance should suit your personal and financial circumstances.
You should consider several factors include:
- Duration of coverage: If you have a 20-year mortgage, for instance, you might opt for a decreasing term policy of the same duration.
- Financial commitments: Your ability to commit a specific amount monthly can influence the policy type and payout size you choose.
- Existing Coverage: Some employers offer ‘death in service’ benefits, which can supplement or even replace the need for a separate life insurance policy.
Inheritance Tax
Remember that some payouts might be subject to inheritance tax, so it’s essential to factor this into your decision.
