What are the different types of life insurance?
If you have financial dependents – in other words: other people who rely on you financially, who’d be financially affected by you dying – it’s likely you have a need for life insurance. This guide can help you decide what type of life insurance may be best for you.
If you have financial dependents you may need life insurance. Life insurance is an insurance policy designed to help give financial support to the loved ones you’d leave behind if you died – so you may only need it if you have other people who’d be financially affected by your death.
Generally speaking, your household and family circumstances usually determine whether or not you need cover (and how much). This is why the need for life insurance typically arises, or changes, after certain life events – like buying a house, getting married, or becoming a parent. These are common triggers for getting life insurance; but it’s also worth bearing in mind that the younger you are, the cheaper it can be to get life insurance. If you’re planning a family, it can be a good idea to get cover in place sooner rather than later.
Term life insurance
Term life insurance is an insurance policy that insures you for a set amount of time, known as the policy ‘term’. The policy can pay out a lump sum if you die within your policy term. It won’t pay out if you die after that time as you’ll no longer be insured.
The good thing about term life cover is that it can be affordable. It tends to be cheaper than other kinds of cover – for example, policies that insure you for as long as you live, however long that may be (like whole-of-life or over-50s cover).
Term life cover can be a good option if you only need insurance for a certain period of time. People often choose this kind of cover if they have financial liabilities they know will eventually come to an end, like paying for a mortgage or having financially dependent children.
Not only can term life cover be a good way of protecting yourself just for the time that you need cover (so you’re not insured for any longer than you need to be) – but it can also be a good way of protecting yourself according to how your needs do (or don’t) change during that time. To suit your needs, you can choose to take out increasing/indexing, decreasing or level term policies.
Increasing/ Indexing Life Insurance
Increasing (also known as indexed linked) life insurance is typically designed to increase with inflation over the term you have chosen to take the life insurance out for. This means that each year your premiums and cover amount are likely to increase.
This kind of policy tends to be suitable if the things you’d need the money for may increase over time – for instance funeral costs rising with inflation.
Decreasing term insurance
- Designed to pay out a lump sum if you die
- Covers you for a fixed policy term (e.g. 10, 20 or 30 years)
- The lump sum amount decreases over time
- Usually cheaper than level term insurance
In a decreasing term life insurance policy, the lump sum of money paid out if you die during your policy term decreases over time. So, if you die early in your policy term, your family would receive a bigger lump sum than if you died nearer the end of it.
This kind of policy tends to be suitable if the things you’d need the money for also reduce with time – a mortgage being the most obvious example.
Level term insurance
- Designed to pay out a lump sum if you die
- Covers you for a fixed policy term (e.g. 10, 20 or 30 years)
- The lump sum amount is designed to stay the same
- Usually more expensive than decreasing term insurance, but cheaper than whole-of-life cover
In a level term life insurance policy, the lump sum of money can be paid out if you die during your policy term. So, if you die early in your policy term, your family would receive the same lump sum as if you died nearer the end of it.
This kind of policy tends to be suitable if you want to leave behind a fixed amount for your loved ones, to help ensure expenses are covered that may not decrease over time. In other words, the amount of money you’d need to pay off debts and/or support your loved ones financially would be the same in 5 years’ time as it would be in 20 years’ time. Or, you might choose this kind of policy simply because you want to leave a set amount of money to your loved ones if you die at any point during your policy term.
Over-50s life insurance
- Designed to pay out a lump sum if you die
- Covers you for the rest of your life
- Usually more expensive than term life insurance
Over 50s Life Insurance is designed for anyone over the age of 50, who would like to leave their
loved ones a lump sum payment upon their death. The money can be used to cover the costs of
your funeral or be left as a gift to your nearest and dearest.
This type of Life Insurance offers guaranteed acceptance, regardless of any pre-existing health conditions you may have. Upon your death, the policy will pay out 100% of your agreed cash lump sum, provided that your policy typically has been in place for more than 12 months, and you have kept up with your premium payments.
Life insurance can get more expensive as you get older, as insurers deem you gradually higher risk
to insure (because, put simply: the older you are, the more likely you are to develop a health
condition or die). This can make term life insurance difficult to get for people over the age of 50,
especially if you already have a health condition.
Over-50s insurance can be an alternative way of insuring your life for people of that age group. It
works by insuring you for the rest of your life, until you die – and can be different to other types of
insurance because it doesn’t require any medical underwriting. For this reason, over-50s cover can
be more expensive than term life cover, but if you’re over the age of 50 and trying to take out a new
life insurance policy, it might be your only option, especially if you already have a health condition.
Summary
- Level Term: Offers a fixed payout, with both the payout and premium staying the same
throughout the length of the policy - Decreasing Term: Offers a payout that reduces over the term, to match a decreasing debt
like a repayment mortgage. Mortgage cover is often cheaper than level cover, but can leave a gap for family cover needs - Increasing Term: Offers a payout that grows over time, to keep up with inflation. Premiums also rise, making it a more expensive choice
- Over 50’s life insurance is designed to help those who want help covering funeral costs or
- leaving behind a small lump sum, without having to go through medical underwriting.
