8 Most Popular Types of Life Insurance

What is life insurance?

First, let's briefly explain what life insurance is. Life insurance is a type of cover that pays a lump sum (called a death benefit) to nominated beneficiaries if the policyholder passes away during the period of cover. Every month, you pay a premium to your insurance company in exchange for coverage.

People take out life insurance to ensure their loved ones receive financial support if the worst happens. It's great peace of mind to know that you've made a difficult time that little bit easier.

You can find out more in our article, What is life insurance?

Types of life insurance

Now, let's look at some of the most popular types of life insurance available on the market. There are so many types because people have different requirements for their life insurance.

Each works slightly differently, with its own advantages and disadvantages. Use this guide to decide which one is right for you.

1. Term life insurance

Term life insurance is the name given to policies that last a specific amount of time. You can select the policy length (such as 10 or 25 years). If you pass away during this fixed period (called the term), your insurance company will pay a lump sum to your nominated beneficiaries.

There are three types of term life insurance based on how you pay your monthly premiums and the amount of cover paid out. The first three types of life insurance we'll look at are term policies.

2. Level term life insurance

Level term life insurance is probably the most straightforward type of life insurance you can buy.

You select the term length and the amount of cover you need. Your insurance company tell you the premium you need to pay every month - and that's that. Your premium payments will remain the same throughout the term of your policy, and the amount of cover stays the same too.

If you unfortunately pass away during the first year or the last year of your policy, your dependents receive the same lump sum death benefit, as specified when you purchased it.

Pros

• Knowing what you'll pay in premiums every month makes it easy to budget
• You can sleep easy knowing the amount your family will receive if you pass away
• You can use level term life insurance to cover long-term ongoing payments like a fixed rate mortgage or school fees

cons

• Because the death benefit is fixed, it does not increase with inflation. The purchasing power of your payout decreases over time
• You have to consider what expenses your loved ones will have at the end of the policy, which could be 25+ years away, not just at the start
• If you do not pass away during the term of your life insurance policy, you lose the premiums you paid. There is no cash value to level term life insurance

3. Increasing term life insurance

Increasing term life insurance is different from level term in that the amount you are covered for increases throughout the length of the policy.

In most cases, insurance companies raise their cover amounts for increasing term life insurance policies annually by the rate of inflation. For example, if you take out life cover for £200,000 on an increasing term and the inflation rate is 5%, your cover amount will rise to £210,000 in year two.

Of course, your premiums will increase too.

pros

• Increasing term life insurance protects your cover against inflation, guaranteeing the purchasing power of your lump sum payout
• You may need more coverage as you get older. For example, if you buy a bigger home and extend your mortgage during the term
• You don't have to apply for new policies or submit medical records every year. Your insurer takes care of it all

cons

• It's harder to budget when you don't know exactly how much your premiums will be from year to year
• Many insurers enforce maximum payout rates and maximum increase rates. If the inflation figure is higher than the maximum increase rate, you lose out
• At the start of your policy, you may not have as much cover as you would like

4. Decreasing term life insurance

The opposite of increasing term, decreasing term life insurance fixes your premiums, but lowers the amount of cover over time, paying out less the further you go through the coverage period.

People usually take out decreasing term life insurance to cover a specific large debt, such as a repayment mortgage. This is because as time passes and the amount you owe your mortgage provider decreases, you require less life insurance cover.

pros

• You can use decreasing term to track your mortgage. (When you renegotiate your mortgage, you may be able to renegotiate your life insurance)
• Premiums are fixed throughout the policy term, so it's easy to budget for your life insurance
• Decreasing term life insurance is typically more affordable than level or increasing cover

cons

• If you only use your life insurance to cover mortgage repayments, there will be nothing left for other expenses, such as funeral costs
• If your goal is solely to safeguard your mortgage, there are other products available, like mortgage protection, which could be more effective
• If you pass away at the end of the term, the lump sum is lower than it would have been at the start, despite you paying more in monthly premiums

5. Whole life insurance

Whole life insurance is as its name suggests. Once you take out your policy (and keep up-to-date) with your monthly premiums, you're covered for your entire life, regardless of when you pass away. This is often called permanent life insurance or life assurance.

Most permanent life insurance policies operate like level term, with fixed premium prices and cover amounts. However, some insurers allow you to change your premium and cover levels. Some may treat it like an investment product and allow you to borrow against it.

pros

• Your dependents are sure to receive a payout from your whole life insurance, whether you pass away one year or fifty years after taking out the policy
• You don't have the hassle of renewing your life insurance policy, as the term never runs out
• It brings you ultimate peace of mind, knowing you've done the best for your loved ones

cons

• Whole life insurance types policies are usually more expensive than term policies
• You need to budget to pay higher premiums for the rest of your life, even after you have retired
• Your needs may change as you get older, but your insurance policy remains fixed

6. Over 50's life insurance

When you reach 50, you are eligible for a different type of life insurance. Specialist over 50's insurance is a whole life plan, so your loved ones are guaranteed a payout. Often, the death benefit is used to cover funeral expenses.

However, you must keep up with your premiums, which can be tricky if you're retired.

20% of over 50's who do not currently have life insurance say they're planning to make a purchase soon - Source

pros

• Over 50's policies have guaranteed acceptance, so you can't be turned down for a policy if you're in poor health, and you probably won't have to undergo a medical exam
• Premiums for over 50's life insurance policies tend to be more affordable than other types
• The death benefit is guaranteed (like whole life cover), so your beneficiaries will receive a lump sum when you pass away

cons

• Although premiums are lower with over 50's life cover, the amount of cover tends to be small as well
• If you live a long time after you took out the policy, you're likely to have paid more in premiums than your dependents receive when you pass away
• Your payout is not safeguarded against inflation, so its purchasing power decreases over time

7. Group life insurance

Group life insurance is insurance provided by your employer as a benefit. If you pass away while employed by your company, your dependents will receive a death benefit.

9.5 million people in the UK are insured with group life cover - Source

pros

• You don't pay premiums. It's all covered by your employer
• Hassle-free - You only have to fill in a few forms and you're covered
• You can still get cover even if you have pre-existing medical conditions, unlike some other types of life insurance

cons

• If you leave the company, you're no longer covered by the group life insurance scheme
• You have no control over your insurer or the terms of your policy
• The amount of cover may not be as much as you require

8. Joint life insurance

As well as your individual life insurance policy, you can also get joint life insurance with your spouse or partner. You buy joint life insurance in the same way as conventional cover, paying monthly premiums for an amount of cover. If one of you passes away, the policy pays out a lump sum to the surviving spouse or partner.

Joint life insurance is great for parents who want to make sure they provide for their children if one parent should pass away.

pros

• Joint life policies are typically cheaper than taking out two separate life insurance policies
• Both partners are treated as equals and covered for the same amount
• It's easier to manage your family's paperwork if there's only one life insurance policy

cons

• If your partner dies, you receive the death benefit. But then, the policy expires and you're no longer covered
• If you and your insured partner separate, altering your life insurance may be a challenge
• If one partner earns significantly more than the other, they may need a higher cover amount to replace their income if they pass away

Find the right life insurance policy for you

It's a great feeling to know that you're looking after your loved ones by providing financial protection if you pass away. However, it's important to take out the right type of life insurance so you don't overstretch yourself while you're alive but still cover your dependents for the future.

Take time to consider why you want life insurance. Is it to cover a specific, finite payment like a mortgage or school fees, or are you more concerned about looking after your family if the worst happens? Get a variety of quite for different types of life insurance and see what suits you best.

Read our recently updated which showcases the best life insurance companies in the UK.