Comprehensive Guide to the Main Types of Life Insurance

Ian Lewis[1]

Ian Lewis

Money Savings Advice Life insurance & mortgage go hand-in-hand

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.

Continue reading to get the definitive guide to all the different types of life insurance.

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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 payment is guaranteed at some point. The 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 that 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 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.

Do I Need Separate Life Insurance if I Have Death in Service Benefits?

Even if you have death in service benefits with your employer, it can be tempting to take out personal life insurance. However, it is highly advisable to take financial advice about your life insurance commitments as it may be beneficial to take out a separate policy after you have left your employment. That way, you will be covered by your employer’s death in the service benefits scheme and then take out separate life insurance after you leave.

Whether you take out comprehensive life insurance after your death, in-service benefits expire, or term life insurance is another question to consider. As not all employers offer death-in-service benefits you may, for example, still have many years of mortgage repayments to consider.

Therefore it might be an idea to discuss your scenario with an adviser - taking out life insurance connected to your mortgage.

Is Tax Payable on Life Insurance Pay-Outs?

No. Thankfully, when life insurance payments are made directly to a beneficiary, there is no additional tax liability. The issue can become a little more complicated where, for example, you are taking out life insurance for business purposes.

It may be that the life insurance payment would be made to the company directly and as a consequence, create a taxable event. This is by no means certain, and as a consequence, it is very important to take financial advice on this type of transaction.

Can I Insure My Business Partner to Protect Our Company?

In order to take out life insurance on another person, there needs to be what is known as an “insurable interest”. This means that the death of the individual would have financial consequences for the party taking out the insurance.

In this instance, as a surviving business partner, you would be left to run the business which may involve taking on significant debt and additional costs. The individual whose life you are ensuring would need to give their consent, but this is a very common practice in the world of business. What level of life insurance would be required is something you would need to discuss with your financial advisers.


Money Savings Advice Tip

Life insurance is growing in popularity. Here at Money Savings Advice, we recommend getting a whole market quote so you can see the monthly costs involved from all providers enabling you to make an informed decision.


Would I Not Be Better With Two Individual Life Insurance Policies?

There is a debate as to whether it is more sensible to have two individual life insurance policies as opposed to joint life insurance cover. Obviously, two individual life insurances could potentially lead to two payments upon death.

As there is potential for two life insurance payments, the combined cost of individual life insurance premiums compared to joint life insurance cover would be greater.

What Are the Death-in-Service Benefits?

Many employers will offer death-in-service as a means of retaining personnel and attracting others. This means that if you die while in employment, then death-in-service benefits will be paid out to your beneficiary. It matters not whether you die carrying out employment-related tasks of mowing the garden - you are covered while in employment.

Typical death-in-service lump-sum payments equate to 3 or four times salary, but this is not set in stone. Your beneficiaries may have the option to receive regular payments going forward rather than a lump sum settlement.

Summary

The life insurance industry is often more complicated than many people assume. While there is a basic whole of life cover and term insurance, there are various hybrids versions of these insurance policies. It is possible to structure life insurance around your specific financial situation, and indeed it should be a consideration when carrying out your annual financial review.

How Can Money Savings Advice Help You With Life Insurance?

Here at Money Savings Advice, we have partnered with some of the UK’s leading Life Insurance brokers. They have already helped thousands of people get the best Life Insurance cover and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.

 

Money Savings Advice Author Ian Lewis

Ian Lewis

Ian Lewis is one of our specialist financial writers. Ian has over 15 years of financial writing experience, having worked for some of the largest financial publications in the UK covering topics from mortgages, equity release, loans and financial claims, to name a few.

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