Life insurance helps your dependents to be financially secure in the event of your death.
When you buy life insurance you stipulate the figure you want the policy to pay out when you die – this term is the sum assured. The premium you pay is based on this amount, and on your age and gender.
Your payments will also be based on the type of cover you choose. There are two fundamental types of life insurance: term assurance and whole-of-life cover, and there are many variations within these categories.
Term assurance is often purchased at the same time as a mortgage, and usually covers the same 25-year period. If you haven’t died at the end of the period, you don’t get anything back. It is a simple insurance with no element of investment which protects your family by paying out a lump sum should you die within a specific time period.
There are several types of term assurance. Level term gives the same payout during the whole of the life of the policy which means that you beneficiaries would receive the same amount whether you died on day one of the policy or whether you died right at the end of the term. It is usually bought with an interest-only mortgage, where the debt only has to be paid off on the final day of the mortgage term.
Decreasing term assurance is where the payout reduces by a set amount each year, finishing at zero at the end of the term. Since the level of cover declines during the term, premiums on this kind of insurance are cheaper than on level policies. This cover is usually taken out with repayment mortgages, where the debt occurs during the mortgage term.
Increasing term assurance means that the potential payout rises by a small amount each year. It is a good way of protecting the original policy amount against inflation.
With convertible term assurance, the policyholder has the choice of switching to another type of life insurance for instance a “whole of life” or endowment policy in the future. I f a person does take up this option; they do not have to submit any further medical evidence.
Instead of paying a lump sum, family income benefit gives the policyholder’s dependents regular payments from the date the policyholder dies to the end of the policy term.
Whole-of-life insurance consists of a policy that lasts throughout your life. This means that your dependents are guaranteed to be paid whenever you die. Premiums are considerably higher than for term assurance since you are certain to die while holding the policy.
There are various types of whole-of- life policy – some offer a fixed payout from the beginning, others are tied to investments, and the payout will relate to their performance. Unit-linked policies are the most popular investment-linked policies usually tied to funds, and with-profits policies, which give bonuses.
Whole- of -life policies are usually reviewable, often after 10 years. At this point your insurer can decide to increase your premiums or lower the cover it offers.
Life insurance can be bought on-line or from the high street through insurance companies themselves or from some friendly societies. Many sell directly to the public. Other outlets selling insurance include comparison websites, banks and building societies and mortgage brokers.
Factors affecting monthly premiums include the sum assured, sex, age and whether or not you are a smoker. Some companies insist on a medical before offering cover, but this is not as common as in the past.
Premiums for life insurance alter over time, and if you do have a policy it might be worth shopping around to find out if you can get a more cost-effective deal. You can normally cancel your existing policy without penalty – but make sure you have another one in place before you do so.