What types of life insurance are there and what are they for
One of the most important decisions you can ever possibly make for the good of you and your loved ones is getting good life insurance. Of course you can never be 100% sure that you have the best sort of insurance until you actually die and it comes into action. It is for this reason that I write this article. It will aim to outline the different types of life insurance available and will hopefully help you find the right sort of cover for your needs.
There are two main types of life insurance on the market. Although many more types exist, these other types are extremely specific and will probably not apply to you, so we will deal with the main two for now. The two types you are best to concern yourself with are known as Term Insurance and Whole of life insurance.
Whole of life insurance is fairly self explanatory and the easiest to explain, as it essentially insures you for the whole of your life. You specify an amount for which you want to insure your life, and you then agree to pay into an insurance policy a certain amount every month until your final day comes in whatever shape or form. You can feature in to this policy “indexation”, which means that your policy performs in line with inflation. This can be extremely useful as the value of money has a big tendency to change over time. At the end of the day, you don’t want to be paying good money into an insurance policy for a specified amount only to discover that when the time comes, that specified amount can barely get your family through to the end of the next week.
The main reason that you would decide to choose whole of life insurance is for the protection of your family. You want to make sure that in the event of your death there is a sufficient amount of money saved for your family to be able to reinvest and provide an ongoing source of income for the future when you are no longer there to provide for them. The downside of this form of insurance is that because it runs for the whole of your life, it is not the cheapest option available. It is, however, the only one that guarantees a cash payout at the end of your life.
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.
The first is decreasing term or mortgage protection insurance. Like any term insurance plan, this plan runs for a set length of time. The difference here though is that the amount insures reduces as each year passes. This is because of what money you are actually insuring. This type of insurance is usually in conjunction with a repayment mortgage. With this sort of mortgage you gradually pay off the whole amount of the loan, so the remainder to pay off reduces each year. Therefore you only need to insure against the amount you have left to pay. The benefit is that the premiums for 100,000 which decreases year on year are much cheaper than for 100,000 on level term. So if you have a repayment only mortgage, this could be the policy 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.
The last two types - convertible term and renewable term - are very similar in that they both allow you to alter the terms of the policy providing those alterations are made before the end of the term. The first one we will describe is a renewable plan. Renewable plans allow you to renew the policy at any time before the expiry date of the original term without any underwriting, or health checks. So a 10 year plan could be extended for 10 more years regardless of the state of your health, as long as you do it before the first plan expires.
The convertible plan takes it to another level. This sort of plan lets you convert the original policy from term insurance plan to whole of life, as long as it is done within the time of the original term. The reason you may want this option is if you couldn’t afford a whole of life policy at the start but find yourself in a position to take one out later. Convertible policies allow you to change to whole of life when you can without having to undergo any health checks.
You should know, however, that convertible and renewable policies are more expensive than regular term policies. Also, when you do come to renew or convert your policy you will be asked to pay the premiums in accordance with a person of your age at that time, which will inevitably be higher than you have been previously paying, so don’t be under the impression that you are getting a free lunch. The main thing is to ensure that you have the right cover needed regardless of your health.
Hopefully this article has gone some way to clear up any misunderstandings you may have had about the life cover options open to you. That said if you are still unsure you are strongly advised to seek independent financial advice because as I said earlier a wrong decision now may not be discovered till it is too late.