- \n
- Level Term<\/a><\/li>\n
- Decreasing Term<\/a><\/li>\n
- Increasing Term<\/a><\/li>\n
- Family Income Benefit<\/a><\/li>\n<\/ol>\n
Whole of Life Policies<\/b><\/p>\n
- \n
- With Profit<\/a><\/li>\n
- Guaranteed<\/a><\/li>\n
- Over 50s\u2019 Plans<\/a><\/li>\n<\/ol>\n
Buying Life Insurance<\/b><\/p>\n
- \n
- Setting Your Level of Cover<\/a><\/li>\n
- Joint and Single Policies<\/a><\/li>\n
- Critical Illness<\/a><\/li>\n
- Switching Policies<\/a><\/li>\n
- Brokers<\/a><\/li>\n<\/ol>\n
Other Considerations<\/b><\/p>\n
- \n
- Writing In Trust<\/a><\/li>\n
- Waiver of Premiums<\/a><\/li>\n
- Disclosure of Medical Information<\/a><\/li>\n<\/ol>\n
<\/p>\n
<\/p>\n
What Are The Different Types of Life Insurance?<\/h2>\n
![\"life](\"https:\/\/www.financenet.org\/images\/lifeinsurancepolicy.jpg\")
\nLife insurance products can be broken down into two broad groups; policies that have a \u2018term\u2019 (a set period of time for which the policy applies) and those that apply for the whole of the holder\u2019s life<\/a>, with the first category being far and away the most popular.<\/p>\nFirst, here\u2019s a look at the variety of different \u2018term\u2019 life insurance products out there;<\/p>\n
<\/a><\/p>\n
Level Term Life Insurance<\/h3>\n
This is one of the most common and cost effective ways of protecting your loved ones against the financial difficulties that they might have to face should you die. Its simplicity lies in the fact that, as well as applying to a fixed term, the amount that the policy stands to payout is also fixed. Whether you\u2019ve held the policy for a day or a decade, you\u2019ll receive the full amount decided upon when you took it out. Likewise, your premiums will stay the same level for the duration of the term.<\/p>\n
One of the main benefits with this kind of insurance is that it\u2019s incredibly easy to budget for your cover, as you\u2019ll know just how much you\u2019ll have outgoing on a monthly basis for the entirety of the term. The only difficulty is deciding how big a lump sum you\u2019ll need to cover yourself and whether this will translate into an affordable monthly premium. (We\u2019ll discuss the things you need to consider when setting your level of cover further<\/a> down the article.)<\/p>\n
One drawback (if you can rightly call it a drawback) of such policies, is that if you survive the term you\u2019ll receive no payout whatsoever. Moreover, your policy will have no cash in value at any time. On the bright side, at least you\u2019ll still be alive!<\/p>\n
Luckily, if you do require on going cover once your plan has come to an end, most policies have a guaranteed renewal clause, meaning you won\u2019t suddenly find yourself without the protection you need. Often the premiums offered will be higher on renewing, which is understandable as, with the original term having elapsed, the insurer is much more likely to have to make a payout second time round.<\/p>\n
Note that, in cases where your health has deteriorated considerably during the course of your policy, you may find you are unable to renew as an \u2018uninsurability clause\u2019 may come into effect. With this and all other policies, if you fail to keep up your payments for any reason you may lose your policy (with the possible exception of scenario where a waiver of premiums<\/a> applies, more on which down the page.)<\/p>\n
You may see this and other life insurance products referred to as \u2018assurance\u2019 rather than insurance. There is no difference in policies labelled one way or the other, it\u2019s just some providers use one word and some use the other. Technically assurance applies when you are insuring against something that will definitely happen, such as death. However, as there\u2019s no guarantee that you\u2019ll die during the term, it\u2019s still called insurance a lot of the time.<\/p>\n
<\/a><\/p>\n
Decreasing Term or Mortgage Term Life Insurance<\/h3>\n
Whereas level term life insurance offers a fixed pay out no matter when in the term it is claimed, as the name suggests, with decreasing term life insurance (which is also sometimes referred to as mortgage term life insurance) the sum to be paid out goes down over time.<\/p>\n
This is because the policy is designed specifically to cover the amount left outstanding on your mortgage should you die. As you continue to make repayments and your debt decreases, so to does the amount your policy stands to pay out.<\/p>\n
Despite the fact that the pay off goes down overtime, the premiums you pay stay fixed throughout the term, just as with a level term policy. The difference is that, as you would expect given that your cover goes down over time, a decreasing term policy tends to be significantly cheaper than a level term policy offering equivalent cover.<\/p>\n
(Note that to obtain this type of insurance you will need to be on a mortgage where you are not merely repaying the interest on the loan, but also the original capital.)<\/p>\n
<\/a><\/p>\n
Increasing Term Life Insurance<\/h3>\n
In contrast to the product described above, with these policies the level of cover you have actually increases over time. In some cases it will be upped annually or at another regular interval as a way of ensuring that the effects of inflation do not diminish the value of your policy. In other cases you can arrange to have your level of cover increased should a certain event occur which marks a major change in your circumstances, for example if you get married or have a child.<\/p>\n
With these policies you can expect that your premiums will also rise if your cover increases, however, these raises will only ever be a reflection of the increased value of the policy. Your premium rating (the insurers assessment of the level of risk you pose based on your health and other circumstances) will stay the same. So, as with a level term option, changes in your health during the term won\u2019t result in bigger premiums.<\/p>\n
<\/a><\/p>\n
Family Income Benefit<\/h3>\n
If you\u2019d prefer your family to be provided with a regular stream of money rather than a single lump sum, you might want to consider using a family income benefit product.<\/p>\n
Policies have a set term, 20 years being a typical example, during which you pay a fixed premium. If you die at any point during this term your family will receive a set level of regular tax free income for the rest of the term.<\/p>\n
These policies are not usually renewable, so you can be left without cover at the end of your term. Furthermore, they have no cash in or \u2018surrender value\u2019 at any point. If you survive the term you\u2019ll not be remunerated in any way.<\/p>\n
Obviously, the cover provided by family income benefit isn\u2019t as great as level term insurance and doesn\u2019t allow for the same level of forward planning. However, as they are cheaper, they provide an affordable way to get a basic level of cover.<\/p>\n
<\/a><\/p>\n
Whole of Life Assurance<\/h2>\n
With a whole of life insurance plan there is no \u2018term\u2019. The policy remains in place permanently until the holder dies. As with \u2018term\u2019 policies, there are various different types of whole of life policy, all of which have their own particular characteristics;<\/p>\n
<\/a><\/p>\n
Balanced\/ Unit-Linked\/ With Profit<\/h3>\n
With these forms of insurance part of the premiums you pay go towards assuring the lump sum for your payout, whilst the rest go into a pool of funds which the insurer invests into various assets.<\/p>\n
The lump sum paid out at the end of the policy will depend on how well these investments perform. The sum you will receive is guaranteed at a certain level, but the extra profits you receive on top of this are determined by how well the investments perform. The profits from the investments are added to your policy annually as \u2018reversionary\u2019 bonuses. Once added, your bonuses become part of the policy\u2019s guaranteed sum.<\/p>\n
These policies have what are know as \u2018reviewable\u2019 premiums, rather than \u2018guaranteed\u2019 premiums. They will start out at a fixed rate, normally for ten years or so, at which point they will be adjusted. According to how well the investments attached to the policy are doing, your premiums may have to go up to ensure that the guaranteed sum you originally wanted can in fact be delivered. Otherwise the assured sum may have to come down.<\/p>\n
In recent years many people holding such policies have found their premiums being raised considerably and such policies have come under fire as many consumers have found themselves forced to shell out higher than expected rates simply to maintain the same level of cover.<\/p>\n
This is a particular problem if unaffordable premium rises come when you are of a more advanced age and would find it hard to find alternative insurance. There is even an argument to suggest that such arrangements make it possible for insurers to charge what they like, as holders will have little choice put to pay up, or lose their cover. (Whole of life policies can usually be cashed in after the first two years, but it is likely that, if your premiums are being raised, cashing in your policy will entail a considerable loss.)<\/p>\n
Always be careful to understand what parts of your policy are guaranteed and which are subject to change if you are considering a policy with an investment element. Furthermore, be sure to thoroughly research how well the insurance company\u2019s policies have performed in the past to get an indication of whether they\u2019re one of the providers that have been helping to give these products something of a bad name.<\/p>\n
<\/a><\/p>\n
Guaranteed Whole of Life Insurance<\/h3>\n
Also know as not-profit whole of life insurance, this is a much more straightforward form of insurance. In essence it\u2019s the same idea as level term insurance<\/a>, in that both the payout and the premiums are set from the outset, only there is no term. The policy only comes to an end when it pays out on your death (assuming you continue to pay your premiums.) As you\u2019d expect, these policies tend to be more expensive than level term options as the insurer knows for sure they\u2019ll have to pay out eventually.<\/p>\n
<\/a><\/p>\n
Specialist Over 50s Insurance<\/h3>\n
There are a number of insurers who provide plans aimed specifically at those over 50 who find themselves without insurance and, as a result of their age, are more likely to have health problems that might prevent them getting onto other plans.<\/p>\n
Typically, these plans are open to anyone over the age of 50 who can afford them, with no medical barriers to acceptance. Premiums are fixed at a rate depending on how big a pay out you require. There is no term, but unlike some other whole of life policies, these plans cannot usually be cashed in.<\/p>\n
Buying Life Insurance<\/h2>\n
When buying life insurance there\u2019s a lot more to consider than just which type of cover is most suited to you. Here\u2019s a look at the various other questions you\u2019ll need to think through;<\/p>\n
<\/a><\/p>\n
How Much Cover Do I Need?<\/h3>\n
Most people choose to set their cover at a level that will cover their family\u2019s main ongoing expenses whilst maintaining a good standard of living. Outstanding debts are therefore of paramount concern and, in many cases, a mortgage will the biggest worry.<\/p>\n
As a result, a lot of home owners choose to set their cover at a level that will allow them to pay off the remainder of their loan (with enough left over to cover other expenses), whilst choosing a term of equivalent length to their loan agreement. This way they know that if that do out live the term of their policy, the burden of their debt will already be gone.<\/p>\n
Aside from simply covering debts, another rough guide you can use to get an idea of how much cover you may need is to multiply the annual salary of your family\u2019s top earner by ten. This should provide enough to cover the care of children if, for example, one partner needs to temporarily give up work.<\/p>\n
As well as setting an appropriate level of cover, with the exception of whole of life policies, you also need to think about exactly how long you\u2019d need the cover for, as there\u2019s no point taking out more protection than you need. For example, if your main aim is to be able to provide for your children should you die, the term need only extend to such a time as they\u2019ll be able to cope for themselves. If it\u2019s for a partner that you help support financially, it could just run until they\u2019ll be able to claim their pension<\/a>. Finally, don\u2019t feel like you have to go for a nice round number. If you only need a 19 year term, take out a nineteen year term. There\u2019s no need to round it up to 20.<\/p>\n
<\/a><\/p>\n
Should I Get a Single or Joint Policy?<\/h3>\n
If you and your partner are weighing up your insurance options you will likely find that you can save a significant amount of money by going for a joint policy rather than insuring yourselves individually.<\/p>\n
However, you need to bear in mind that a joint policy will give you a much lower level of cover. This is because the policy will only pay out for the first death. This means that should you or your partner pass away, the survivor will be left without any further cover.<\/p>\n
It\u2019s always worth comparing quotes for a joint policy against the combined cost of what you are able to obtain individually. In addition, remember that it could be possible to use a combination of individual policies to better reflect your financial situation. For instance, if there\u2019s a large discrepancy in your incomes, you may find you get all the cover your family needs for a better price by placing the main earner on, for example, a guaranteed whole of life plan, whilst the other partner takes a cheaper option.<\/p>\n
<\/a><\/p>\n
Do I Need Critical Illness Cover?<\/h3>\n
Critical illness policies are often offered alongside or as add ons to life insurance policies, however, you should think carefully before signing up to a policy. Though they sound as if they\u2019re designed to give you financial protection should you be unable to work, they usually only cover a limited set of specific conditions.<\/p>\n
You may well find that by having a life insurance policy in place with some form of income protection policy, you may not even need any more cover. If you are interested in taking out a serious illness policy you should make use of a specialist adviser who\u2019ll be able to work with you to ensure you end up with the cover you need.<\/p>\n
<\/a><\/p>\n
Should I Switch Policies?<\/h3>\n
If you already have life insurance, but feel you could have got a better deal elsewhere, you aren\u2019t stuck. If you can secure a cheaper quote, you\u2019re free to go ahead and take at a new policy before cancelling your old one.<\/p>\n
It\u2019s worth remembering that part of the beauty of a product such as level term insurance is that you\u2019re premiums are set at a fixed rate for the whole of your term. This is attractive as, inevitably, we\u2019re more at risk of dying as we get older. Therefore, if a considerable amount of time has passed since you took out your policy, you may find it harder to get a cheaper premium on a new plan.<\/p>\n
Conversely, if you\u2019ve made significant improvements to your lifestyle during the course of your policy may well find you stand to make some big savings by switching or getting a new quote. This is especially worth doing in cases where your risk of death is indisputably diminished. For example, you may have high premiums due to holding a position in a dangerous occupation, which you\u2019ve since left for an office job. Similarly, making the switch from being a smoker to a non-smoker will make a major difference to how much you\u2019re expected to pay. (Within the industry the standard for qualifying as a non-smoker is to have been completely free of cigarettes and tobacco for at least a year. Needless to say, you won\u2019t be able to smoke again or you\u2019ll invalidate your new policy.)<\/p>\n
If planning a move, you also need to think about the fact that, unless you have a policy with a cash value (such as a with profits whole of life plan, for instance) you won\u2019t be getting any return on the premiums you\u2019ve already paid. It makes sense to factor this loss into your calculations when deciding if it\u2019s worth moving to a new plan.<\/p>\n
<\/a><\/p>\n
Should I Buy Through a Broker?<\/h3>\n
Using a broker can save you thousands of pounds, especially if they\u2019re cheap. Indeed, brokers only exist in the first place because they have access to deals that insurers simply won\u2019t offer to individuals. So, even you are able to hunt down the perfect policy on your own, there\u2019s still a good chance you\u2019ll be paying more by going direct.<\/p>\n
However, whilst choosing to use a broker is relatively straightforward decision, picking which one to use is a little trickier. All brokers have different arrangements with insurers and different levels of access to different deals, so it\u2019s important to shop around as much as possible to see who can offer what you want at the best price.<\/p>\n
The advantage here is that since many life insurance products are very straightforward (for instance, with level term insurance you pick your level of cover, the length of your term and then either survive or claim) you can rest assured that you won\u2019t be losing out by simply going for the cheapest policy that provides the cover you\u2019re after. This makes the sometimes laborious process of shopping around a lot easier.<\/p>\n
As many of these products are so simple, you can make further savings by going for an \u2018execution only\u2019 broker. When you take on a broker on this basis they will simply find the best deal for the cover you tell them you need, rather than furnishing you with advice. Of course, if you\u2019re situation is a little complicated enlisting the help of a professional to help figure out an airtight insurance plan can be very prudent. Brokers will offer a \u2018with advice\u2019 service which, as the name suggests, will entail helping to establishing the best policy for you, as well as tracking down a great deal.<\/p>\n
If you want to make sure that your life insurance plan makes sense alongside your other financial affairs you may be better off talking with an Independent Financial Advisor than a broker, as they\u2019ll be able to take a wider view of things.<\/p>\n
Other Considerations<\/h2>\n
Finally, here are a few other considerations you should think about before taking out a policy;<\/p>\n
<\/a><\/p>\n
Writing In Trust<\/h3>\n
Your life insurance policy counts as part of your estate along with all of your other assets. As such, it\u2019ll be subjected to inheritance tax which can take quite a toll on the amount your loved ones will end up receiving. One step you can take to avoid paying more inheritance tax than necessary is to place your policy in a trust.<\/p>\n
When an asset is placed in a trust it is set aside and handled by a trustee until the beneficiaries are intended to receive it. By writing a life insurance policy in trust you can ensure that, when you die, the funds will be paid directly to those intended to receive them. It won\u2019t go into your legal estate and will therefore not contribute towards the \u00a3325,000 threshold under which no tax is payable.<\/p>\n
Another advantage of having your policy written in trust is that your named beneficiaries will receive their money quicker. This because probate (the process which establishes whether the executor of your estate has the right to deal with your possessions) does not to need to be granted for the trustee to pass the money on to people it\u2019s intended of.<\/p>\n
Having a policy written in trust is straightforward and will generally be offered to you as a free optional service by your insurer at the time you take the policy out.<\/p>\n
Despite the many upsides to writing in trust, there are potential down sides. For instance, you will lose some of the flexibility you might otherwise have. Trusts are difficult to cancel once they\u2019ve been put in place, so you need to think carefully before setting things in stone and be sure to seek out advice as to whether it\u2019s the best thing for you.<\/p>\n
<\/a><\/p>\n
Waiver of Premiums<\/h3>\n
In most cases, if, for whatever reason, you find yourself unable to pay your premiums, you will lose your plan. Needless to say, if you\u2019ve spent a decade or more paying into a policy only to loose it, it could have disastrous implications for you and your family.<\/p>\n
Going for a policy with a waiver of premiums provision can help you ensure that, should you be able to continue working due to an ailment of some kind, you\u2019ll remain covered. Normally, such a provision can be added to a policy for a relatively low increase in premiums. If you think there\u2019s a chance that illness will prevent you from being able to pursue your line of work, this could be something to consider.<\/p>\n
- Waiver of Premiums<\/a><\/li>\n
- Joint and Single Policies<\/a><\/li>\n
- Guaranteed<\/a><\/li>\n
- Decreasing Term<\/a><\/li>\n