Life and health insurance protection underpins most good financial planning and these common types of insurance can ensure that if the worst should happen, the right amount of money will reach the right hands at the right time.
In order to find the right life insurance policy for you, it’s imperative to understand the various options available to you. Read on for our complete guide to the most common life insurance policies and their pros and cons.
Life insurance policies
Term assurance, sometimes called Term or Temporary insurance, is the right sort of cover for many family protection needs. It provides insurance at the lowest cost for the period that it is required. Other types of life insurance for family protection generally involve much higher costs than term assurance to provide comparable levels of cover.
Term insurance is the simplest form of life insurance, working in a similar way to your house insurance. The policy will pay out if you die during the term, but if you survive to the end of the term, the contract simply ends and there is no pay-out.
Whole of life assurance provides cover for the whole of your life, as the name implies and can be used in inheritance tax planning and provision for funeral expenses. Endowment policies are essentially savings products with some added life assurance. At one time they were often linked to mortgages although that practice has fallen well out of favour and they are much less widely sold than they were in the past. Both whole life and endowment policies can have substantial investment values that you can cash in, unlike term assurance policies which never build up a cash value.
The cost of life assurance varies considerably according to your age and state of health. The cost of 10 year term assurance for a 30 year old is about a tenth of the same cover for a 60-year-old. A person’s state of health is also very important. Poor health could mean increased premiums or even the possibility that the individual cannot be insured.
Term assurance policies
Level term polices pay out a fixed sum if you die during the term of the policy whereas Renewable term assurance plans can be extended for an additional period of cover at the end of the term, regardless of your state of health at the time. Convertible term policies are convertible to a whole of life or endowment policy regardless of your health. These policies cost more than level term assurance.
Increasing term policies have an element of inflation proofing. You either have the option to increase the cover from time to time by a set percentage, or in some cases, the amount of cover increases automatically by a set percentage – or perhaps the rate of inflation. These policies also cost more than level term assurance.
Decreasing term policies run for a fixed period of time like level term assurance but the amount of cover reduces each year. Decreasing term is typically used to cover a liability that you expect to decrease year on year, such as a mortgage or for covering school fees until a child reaches the age of 18. The cost of this cover is less than level term assurance because the overall amount of insurance provided over its lifetime is lower.
Mortgage protection is a type of decreasing term assurance but the cover reduces in line with the outstanding capital on a repayment mortgage where you pay off some of the capital every month. The higher your mortgage interest rate, the more slowly the outstanding mortgage capital falls each year. It is important to ensure that the interest rate specified in the policy matches the mortgage it is intended to cover or that the rate is higher than the interest rate you expect at any time during your mortgage.
Family income benefit is a type of policy pays an annual sum if you die during the term of the policy and those payments continue until the end of the term. Family income benefit can provide the highest initial cover for the lowest cost because it is a form of decreasing term insurance.
If you are employed, you may well have life cover from your pension scheme and should generally take this cover into account when deciding how much insurance you need. If you are offered this type of cover, it is usually worth considering because it is very inexpensive, mostly because of its tax advantages. Employers can also take out Relevant life policies on the lives of employees. They are not part of their pensions, but they have many of the same tax advantages.
Finally, joint life policies are for situations where you could take out a policy on more than one life. The policy could then pay out after both the insured people have died – this is often used for inheritance tax planning. Alternatively, the policy might be arranged so that it pays out when the first of the insured people dies perhaps to pay off a mortgage or just to provide some extra capital. Once a joint life “first death” policy has paid out, it would mean that the second person would no longer be covered by the policy after the first of the couple dies.
Generally speaking the cost of two separate term assurance policies is much better value than a joint life first death term assurance plan whereas a joint life whole life policy tends to give be quite considerably cheaper than two separate whole life plans and the joint life “last survivor” policies that pay out on second death can be surprisingly reasonable in cost.
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