Taking out a life insurance policy is crucial so that your loved ones are provided for after your die. There are numerous policy options, with “no size fitting all.” The right life insurance policy for you depends on your own specific circumstances. You need to understand the various policies before you select the best policy for you.
There are two kinds of cover:
- Term life insurance or term assurance; and
- Whole of life insurance.
Term assurance pays out a lump sum if you die in the selected period. This is the least costly and most popular choice. Whereas, whole of life offers extensive protection levels given that it covers you for the entirety of your life. Hence, it costs more.
Whole of life insurance
A whole of life insurance policy is aimed at providing a level of life assurance which can last your entire lifetime. This kind of cover guarantees a lump sum payment when you die, providing the payments are made continuously from the beginning of the policy.
The lump sum can be paid out at any time, so not within a fixed period, as is the case with term assurance. The policy proceeds are usually given to the policy holder’s family or beneficiaries of their estate.
The premium you pay is divided to buy life cover and amass an investment reserve. The concept behind this is that the investment growth in the early years subsidises the higher cost of life insurance as people get older. Thus providing insurance for the entirety of your life, given that you pay the premiums. This ought to mean that there is a “surrender value” if the policy is cancelled.
Usually these policies insure for large sums, normally to cover future inheritance tax bills. This, along with the fact that a claim is inevitable, means these policies can have higher premiums than term life insurance.
Policies that are Reviewable
Premiums sold on what is called “maximum cover” and are guaranteed not to go up for the first 10 years. Policies can be “reviewable” or “non-reviewable.”
With non-reviewable policies the premiums paid can be fixed from the start date and remain the same until the end of the policy. A reviewable policy involves premiums being reviewed on a ten year basis and may increase, often significantly to make sure that the policy remains on track and is going to pay out the expected lump sum.
When it comes to calculating whether or not premiums need to increase, the insurer considers how the underlying investments have performed up to then as well as considering the customer’s personal circumstances, like health and life expectancy.
Should a policyholder be unable or unwilling to increase the amount they pay in premiums at review time, they can cash in the policy, or accept the policy is going to provide a smaller sum than they had considered at the outset. Consumers have to take care when considering a whole of life policy, as they may end up paying more into such a policy than they will ever receive.
Types of whole of life insurance
Whole of life insurance policies differ:
Not-profit whole life policies
Here, a premium is payable throughout your life, and a fixed cash sum is paid upon your death; with fixed monthly premiums.
Not-profit insurance has no element of investment, and is like term insurance. Hence, monthly premium payments contribute directly to the agreed cover and the beneficiaries do not benefit from any extra investment profits upon your death.
Without profit whole life policies
A without profit whole life policy is like a non-profit policy. However, the amount paid is the sum assured as well as accrued profits.
Low cost whole life policies
A low cost whole life policy guarantees that the sum paid out upon your death is going to be greater than the total sum as well as the bonuses.
Over 50s life insurance plans usually insure a minimal amount, and are typically designed to cover funeral costs. Premiums are often guaranteed for life, and payouts are often small, ranging from £500 to £2,000.
Those purchasing such policies can end up paying more than the policy is ever likely to pay to their heirs when they die.
Endowment life insurance
An endowment life insurance policy is the same as a saving scheme with life insurance. They combine the benefits of a savings scheme with benefits of a life insurance policy. These policies are usually taken alongside mortgages.
Should the policyholder die during the policy term, their loved ones get a lump sum to aid towards covering unpaid bills or mortgages or towards funeral expenses. Should the policyholder be alive at the end of the term, normally upon retirement or when a mortgage is paid off, they normally receive a lump sum payout.
This is usually related to the stock market; therefore, the amount you receive can be less than the amount you have paid in.
Term life insurance
Simple term life insurance policies are applicable over a fixed term and pay out a lump sum should you die during this term. Should you not die over the fixed term, you get nothing back.
Term assurance is the least expensive and most popular kind of life cover.
Level Term life insurance
Level term life insurance is aimed at paying out a guaranteed amount which remains unaltered throughout the duration of the policy.
Term assurance can be a level amount, usually an amount to cover an interest-only mortgage.
Increasing Term insurance
Increasing term insurance is aimed at combating the fact that value of money decreases every year due to inflation and to keep the sum assured at the same real value throughout the insurance term.
By increasing the sum assured you can make sure that the amount of money you initially agreed would provide for your dependents in case of your death retains its value.
Decreasing term insurance
With decreasing term life insurance, the amount paid drops during the policy. This kind of policy is usually used to protect a repayment mortgage.
Convertible term insurance
Convertible term insurance is a level term policy which permits you to alter your term policy into a permanent one at some stage. You can opt to revert your policy to a whole of life insurance policy or possible endowment insurance. The insurer has to renew the policy at this point irrespective of any alterations to the policy holder’s health.
Preferably, a convertible term life insurance policy ought to be bought at a young age.
You can change the policy by upgrading to the cover level that covers your longer term needs later on.
Joint life insurance
When purchasing life insurance, you can select between a joint policy and single life policies. Previously, joint life cover was much cheaper than taking one policy. However, there are now benefits in taking single life policies.
Joint life insurance is usually written on a “first death” basis; this means money is paid out once the first of the nominated policyholders passes away, and the policy then terminates. This is the less expensive option. However, you could possibly leave a partner having to find another life insurance policy in old age.
By taking out two policies, cover is still in place for the surviving person in the case of the partner’s death. This also means any future dependents are protected and the surviving policy holder does not have to try and find another life insurance policy in older age when premiums are even higher. Obtaining two single policies can be regarded as being the better option given the possibility of relationship breakdown.
Inter-linked term life insurance
Certain insurers offer the option for the premium to be increased every year in association with the retail prices index (RPI). The aim herein is to maintain the sum assured at the same real value over the policy term.
This assists in making sure that the amount of money your dependents are going to receive in case your death which you initial agreed upon with the insurer retains its value and is adequate. However, for this extra benefit you are normally forced to pay higher premiums as you go along.
How do I Buy the Right Policy for me?
When purchasing life cover, ensure you shop around to compare prices and get the right quote for you. Do not go by price alone; consider what the policy covers and extras within the cost to make sure that you are obtaining the best value for money, as well as the best coverage.
Speak to a FCA regulated advisor today for FREE independent advice. Simply complete your details below and our agent will call to discuss your requirements.