Types of life insurance
Types of life insurance
There are two basic types of life insurance: ‘term life’ and ‘whole-of-life’. But within those categories, there are different variations.
The cheapest, simplest form of life insurance is term life insurance. It is straightforward protection – there is no investment element, and it pays out a lump sum if you die within a specified period. There are several types of term insurance.
The other type of protection available is a whole-of-life insurance policy, designed to provide you with cover throughout your entire lifetime. The policy only pays out once the policyholder dies, providing the policyholder’s dependants with a lump sum, usually tax-free. Depending on the individual policy, policyholders may have to continue contributing right up until they die, or they may be able to stop paying in once they reach a stated age, even though the cover continues until they die.
Clarify what you want the life insurance to protect
Generally speaking, the amount of life insurance you may need should provide a lump sum that is sufficient to remove the burden of any debts and, ideally, leave enough over to invest in order to provide an income to support your dependants for the required period of time.
The first consideration is to clarify what you want the life insurance to protect. If you simply want to cover your mortgage, then an amount equal to the outstanding mortgage debt can achieve that.
To prevent your family from being financially disadvantaged by your premature death, and to provide enough financial support to maintain their current lifestyle, there are a few more variables you should consider:
- What are your family expenses, and how would they change if you died?
- How much would the family expenditure increase on requirements such as childcare if you were to die?
- How much would your family income drop if you were to die?
- How much cover do you receive from your employer or company pension scheme, and for how long?
- What existing policies do you have already, and how far do they go to meeting your needs?
- How long would your existing savings last?
- What state benefits are there that could provide extra support to meet your family’s needs?
- How would the return of inflation to the economy affect the amount of your cover over time?