All About Life Insurance
None of us like to think about dying, but if you have a family to look after, arranging life assurance could give you some peace of mind and protect your family’s future. But what are the different types of life assurance available?
Term InsuranceIf you are looking for a relatively inexpensive form of life insurance, then term insurance could fit the bill.
With term insurance the life insurance company you choose guarantees to pay out on a policy within a given time period (the ‘term’).
However, should you survive beyond the timeframe specified by the policy, no benefits will be paid.
The length of the term will be set out in the policy from the outset, and could be anything, from years to decades. Most policies are created to provide insurance while the policyholder is in employment and are designed to provide a lump sum to take the place of the policyholder’s salary.
There are several different types of term assurance available, designed to suit the different needs of a variety of people.
Level Term InsuranceFor example, a ‘level term’ policy pays a benefit when the policyholder dies, and the benefit paid remains the same throughout the length of the policy. Level term policies are usually taken out to cover the cost of a specific outstanding cost or liability, such as an interest only mortgage.
Decreasing Term InsuranceA ‘decreasing term’ policy will pay a benefit on the policyholder’s death. However, the level of benefit will reduce over time, until it reaches zero at the end of the policy. This type of insurance is often used to provide cover for a repayment mortgage, where the capital value owed will decrease steadily year after year.
Decreasing term policies tend to be less expensive than level term, because the amount they agree to pay out falls the closer they get to the policy’s expiration date.
Term insurance is very popular, however there are always plenty of apocryphal stories of people who have passed away before getting round to renewing their insurance policy.
You should therefore always ensure that you know when your term insurance policy is due for renewal and that you are not left without any cover.
Whole of Life PoliciesFor people who would prefer insurance with a bit more permanence, insurance companies also offer ‘whole of life’ policies.
These are designed to pay out a sum following the death of the policyholder, whenever it occurs. The premiums you pay are therefore more expensive.
Whole of life policies combine an insurance policy with an investment. Policyholders will pay a monthly premium that is used to purchase units in an investment fund.
These units are regularly cashed in by the insurance company to pay for the level of cover that you have specified.
There are several different levels of cover available, from minimum to maximum, depending on how much you are prepared to pay in premiums.
With-Profits PoliciesAnother investment-related insurance product is the with-profits policy. Each year the insurance company will increase your level of life cover by additional bonuses to your lump sum each year, depending on how well the investment portion of the portfolio is faring.
When the policyholder dies, the insurance provider will also pay a terminal bonus, increasing the final payout even further. Investment-based insurance policies usually have a termination value if you decide to cash in your policy early.
However, because of the investment administration charges associated with this sort of product, if you leave in the early years of the policy you may not get back the amount already paid in premiums.
Choosing the Right Life Insurance PolicyFinding the right life insurance product largely depends on the level of cover you can afford, and how long you would like the cover to run for. However, it is widely considered that whole of life policies can be expensive, with high administration costs and are often linked to poorly performing investments.
With-profit funds have suffered in the past few years as poor investment performance has seen the annual and termination bonuses paid out to policyholders shrink alarmingly.
Term assurance is more straightforward. You choose the right level of cover, over the policy term you feel most comfortable with, and you pay regular premiums. However, there are a number of different types of term policy to choose from, and a very competitive marketplace. Take your time and do your research before taking out a policy.