Let’s assume you’ve not been living in a remote cave in the Outer Hebrides for the last 40 years. Given that, chances are you’ve heard of life insurance. Furthermore, I’d hazard a guess that you’ve been told at some point that you ‘need’ to take some types of term life insurance out, be it a single or joint life insurance policy.
Whether it’s your financial advisor or mortgage broker, or your friends and family, most of us have had some sort of recommendation to take out life cover. Be honest: you likely raised an eyebrow when your kids suggested it, didn’t you?
So what exactly is life insurance? Moreover, do you really need to think about buying life insurance?
How do these types of term life insurance work?
Contrary to popular opinion, the term ‘life insurance policy’, or as it’s usually referred to by industry professionals, ‘protection policy’ is an umbrella term that covers a catalogue of insurance products related to your life and your health.
The most common protection policy is ‘term life insurance’. Generally speaking, ‘term life insurance’ refers to a mechanism for the transfer of risk over a predetermined period of time.
Sorry, did you want that in English?
Term life insurance will pay a lump sum to you or your family if you face a terminal illness diagnosis or die within the period of time stated on your policy.
By taking out a policy, you transfer an element of your risk (the financial loss your family would face if you were to pass away) to your insurance provider. That insurance provider, in the event of a successful claim, mitigates that risk by way of a lump sum payment.
But which type of term insurance should you be looking for?
Different types of term life insurance
Term life insurance is available in three categories:
- Level term;
- Decreasing term;
- Indexed/increasing term.
Each type of policy has its own unique impact on the cover you or your family could receive.
Level term insurance
Level term cover stays the same throughout the lifetime of the policy. Let’s suppose that you have cover for £250,000 when you take the policy out.
As a result, level term insurance covers you for the same amount – right up until the policy’s expiration date. Simply pay the premiums, and level term insurance covers you from day 1 for the full death benefit your policy offers.
Decreasing term insurance
Decreasing term cover, as the keen detectives amongst you may have deduced, reduces in value over the policy’s lifetime.
Subsequently, decreasing term insurance policies are often a smart option in order to protect a repayment mortgage or other form of debt. The idea is that as your need for protection comes down (through repayment of the debt), the amount of protection you receive reduces in line.
As a result, your starting price is lower than that of a level term policy (see the table below).
Indexed/increasing term insurance
You guessed it: increasing term cover increases over the policy lifetime. Complicated, isn’t it?
These types of term life insurance are also known as indexation. An indexed/increasing term insurance policy covers is slightly more nuanced than level or decreasing term cover.
There are different ways and rates at which your cover amount could increase. The most likely of which is in line with the Retail Price Index (RPI).
In order for increasing term insurance policies to maintain their value, an RPI linked term policy has its cover amount increase, usually each year, in conjunction with RPI. There’s one thing to bear in mind, however, and that’s to do with higher premiums. Simply put, with most policies of this kind, the monthly premium will also be subject to increase.
This is what your cover could look like over a 20-year period depending on which level of cover you decide to take.
It’s important for me to note that this representation is presented purely as a rudimentary example. The insurance company you choose, the type of policy they offer, changing rates of inflation, and other factors could impact your policy differently. Make sure to bear this in mind and, if possible, seek advice from a professional.
As life expectancy increases, increasing term insurance policies are becoming more and more popular due to the potential difference in value from the day you take your policy out and the time that a claim is made.
Joint life insurance
Like the increasing and decreasing terms, all types of life insurance is all also available as joint policies.
A joint life insurance policy is exactly what it sounds like: one policy that protects two people’s lives.
Joint life insurance is usually for couples but isn’t exclusively for those of you in relationships. Given that there is an ‘insurable interest,’ any two people could take out a joint life insurance policy. This includes separated parents or even business partners.
Joint policies can behave differently depending on your circumstances and could payout on the first death, the second death, or both (these are referred to as a first event, a second event, or dual event). Covering both lives is likely to mean higher premiums because there is a potential for 2 full payouts from the insurance company.
An example of the practicality of the types of life insurance policy could be:
- FIrst event – To cover a mortgage only.
- Second event – to leave a lump sum as an inheritance to your children or other loved ones.
- Dual event – to cover a mortgage, leave an inheritance and cover funeral costs for both policyholders.
Other types of life insurance
The term “life cover” encompasses far more than the standard death benefit policies we’ve mentioned above.
Other policies on the market include:
- Income protection
- Family income benefit
- Critical illness cover
- Over 50s life cover
- Whole of life insurance
We’ll be covering all of these insurance options in more detail. However, it’s important when buying life insurance to know what in your life needs the most protection? If possible, having a variety of these insurance products is ideal.
This doesn’t always mean higher premiums though. Having some income protection or critical illness insurance could mean that your requirement for term life assurance is actually lower than without.
Our advisors are authorised and regulated by the Financial Conduct Authority and trained to give you the best advice for your personal circumstances. To explore your protection options and find out how to prepare for whatever life throws at you with no obligation, no pressure, free of charge consultation, book one today.