Getting the right type of life insurance for you and your family can be one of the most important decisions you will ever make. The major problem with this decision however is, if you get it wrong you will probably not know until you have died and it is too late. So this article has been written with the hope that it’s a clear breakdown of the cover available to you will help you to make the right choice now and see you right in the future.
Essentially there are really two types of life insurance available on the market there are more but owing to their particular niche uses they are probably not relevant to be discussed here. The main types that you will come across, and probably need in one way or another, are Term Insurance and Whole of Life Assurance.
Whole of life insurance is probably the most simplest in so much as it insures you for the whole of your life, you could say it does what is says on the tin. You take out whole life insurance for a set sum assured and you just keep paying it till that fateful day comes. You can add features such as indexation to the benefit, this means that the sum assured (and the premium) will rise with inflation.
This is a valuable feature as what is a large amount of money today will not be a lot of money in the distant future, so one well worth considering. Let’s face it you don’t want to take out life insurance now for a lot of money only to find out it would barely take you out for dinner 40 years later.
The reasons you would go for whole life insurance is family protection, so for example you want to make sure that if you die your family will still be able to maintain their standard of living by using the cash from the life insurance to invest and make a return equivalent to the income they have lost in the event of your death.
It has to be said however that because whole life assurance runs for the whole of your life it is not the cheapest life insurance you can buy but then it is the only insurance that assures you of a payout which is why it is known as whole of life assurance.
The other type of life insurance comes in many guises but is simply known as Term insurance for the basic reason that it runs for a specified term, anything from one year to 50 or 60 years. You set the sum insured you require and you decide what term you like and that is it, it will run for that period at that level.
If you die during that period it will pay out the benefit, if you don’t it will just cease and that is it. Term insurance can also include indexation, as explained earlier, it doers the same thing just increases the premium and sum insured at the rate of inflation.
Term assurance as I have said has many guises there is Level term, decreasing term also known as mortgage protection there is family income benefit or family income plans, there is convertible term insurance and there renewable term insurance. I will explain in the following paragraphs what these plans actually are should you need a particular one for your situation.
First is decreasing term or mortgage protection. This plan is the same as all term plans in so much as it runs for a specified period of time. However the difference is that the sum insured reduces year in year out. The reason for this is linked to the use it is put to. You would normally use this type of plan to cover a repayment mortgage and with repayment mortgages the amount of debt falls year in year out so the plan just mimics that reduction. The benefit of this is the premiums for 100,000 cover for mortgage protection which decreases each year are a lot cheaper than for 100,000 on level term. So if it is a repayment mortgage you need to cover then this plan is possibly the one for you.
Family Income Benefit, this plan in the big scheme of things is quite young; it was born out of the need for families to produce an amount of income each year rather than just a lump sum. The problem with a lump sum for family protection is it is incumbent on the beneficiaries to invest the money to produce the income they have lost as a result of the life assureds death.
Family income plans do this with the minimum of hassle. All you do is take out the plan for a set period of time and for a set amount of income per annum and if the life assured dies then the plan just pays out that income each year until it has run its full term.
Convertible term insurance and renewable term insurance are very similar in so much as they allow the plan to be changed in some way in the future as long as that change takes place before the end of the term. Renewable term insurance allows the policy holder to renew the plan for a further term without any underwriting (that means no health checks) this means you could have a 10 year renewable term plan and essentially renew it for a further 10 years regardless of your health as long as you do it before the first ten year term has finished.