There are many different types of life insurance, and it is very important that you pick the most appropriate option for your scenario. You may be looking to provide for your partner or family upon your death or even trigger a payment to your business partner.
Working your way through the maze of different types of life insurance can be challenging, and it is important to take advice.
As our lives become more complicated, so we have seen an increase in the different types of life insurance available. While the main options are whole of life cover and term insurance, there are different variations to take into account.
What Is Whole of Life Cover?
As the term suggests, this type of life insurance policy will cover you for the whole of your life, and therefore a payment is guaranteed at some point. Whole of life cover is the most expensive type of life insurance, as you are covered for all of your life, but it is a useful means of providing for your partner and family in the future.
What Is Term Insurance?
Term insurance is basically life insurance for an agreed period of time. If you were to die during this period, then the policy would payout. However, if you died after the period of cover had expired there would be no life insurance payout.
Why Choose Term Insurance Over Whole of Life Cover?
This is a perfectly valid question and one which many people will be asking their advisers. The answer is simple, with term life insurance cover you could, for example, arrange for the cover to coincide with your mortgage. Let’s assume you had a 25-year interest-only mortgage for £150,000.
You could arrange term life insurance cover for a 25 year period which would pay out £150,000 upon your death – allowing your partner/family to repay the mortgage capital from the life insurance payout.
What Is Decreasing Term Life Insurance Cover?
Decreasing term life insurance cover is a hybrid of the basic term insurance. Taking the scenario of a mortgage for £150,000, but this time a capital repayment mortgage, the actual mortgage capital outstanding would reduce with each mortgage repayment.
So, if you took out basic term insurance cover on your initial mortgage, then you would be over-insured at the end. Therefore, the payment from decreasing term life insurance cover (often referred to as mortgage life insurance) will reduce in line with your outstanding mortgage as the potential payout is reduced going forward so your premiums would follow suit.
What Is an Increasing Term Life Insurance?
Increasing term life insurance does exactly what you might expect; the death payment element will increase each year by a measurement such as the RPI/inflation. This type of life cover is not necessarily linked to any specific personal debt but more a means of maintaining the spending power of the beneficiaries in the event of your death.
For example, a £100,000 payment today would only have the relative spending power of £95,000 next year if annual inflation was 5%. If this is the impact on the relative spending power of £100,000 after one year, can you imagine the relative reduction in spending power after 25 years when adjusted for inflation?
This ability to maintain relative spending power going forward can be very useful, although it comes at a price. As a consequence of the ever-increasing payout on death, the insurance company would require higher premiums.
What Is Renewable Term Insurance?
Renewable term life insurance is a hybrid of the basic term insurance, but there is a renewable option when the fixed period comes to an end. As a consequence, you would be able to renew the term insurance to cover a period of your choice, but you wouldn’t need to take a new medical. However, there may be an increase in the monthly premiums simply as a consequence of your age at the renewable date.
In the event that you had developed a medical condition since the initial life insurance policy was agreed you would need to disclose this to your life insurance provider. They may decide against renewing your term insurance, increase premiums or perhaps exclude specific medical conditions when considering death payments.
What Is Joint Life Insurance?
This is not as strange a question as many might assume! A joint life insurance policy is a single insurance policy which covers two people. However, the policy will only payout on the death of the first of the named individuals after which the cover would be terminated.
The level of payment could be linked to outstanding mortgage liabilities or other debts – ensuring that the surviving individual is supported to a certain extent.
Should I Take Financial Advice About Life Insurance?
It is certainly advisable to speak to an insurance broker, an independent and tied broker, to check out the best deals on offer for your situation. However, it is important to look at life insurance, together with the broader aspects of your financial situation.
Would death-in-service benefits cover your outstanding debts? Might you require an additional cover to pay off all your debts in the event of your death? Perhaps you would also like to leave your family surplus cash in the event of your demise?
One issue which many people fail to consider is that of joint loans, joint mortgages and for example, joint credit cards. Legally each named party is liable for the full amount outstanding and not a 50/50 share as many believe.
This is a common misconception and one which can prove extremely costly after the death of an individual. So, if you have a £20,000 personal loan outstanding, £10,000 does not pass with you on death. The individual with whom you took out the loan will be responsible for all outstanding payments.