Because everyone is different, there's a wide range of different types of life insurance. The right one for you depends on what you want to achieve when you buy life insurance. In this guide, we'll look at each type of life insurance policy. We'll explain how it works and also show you the pros and cons.
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?
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.
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.
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.
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.
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.
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.
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
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
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.
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.
Disclaimer: This information is general and what is best for you will depend on your personal circumstances. Please speak with a financial adviser or do your own research before making a decision.
Level term life insurance is the most common type of policy. People like it because it's straightforward. You always know how much you are going to pay in monthly premiums and how much your dependents will receive if you pass away.
However, not enough people in the UK have life insurance at all. A recent study found that only 35% of Britons have life cover, despite a majority agreeing that it would benefit their family.
Yes. You can take out as many life insurance policies as you choose. While most people only have one life insurance policy, you could theoretically have more than one to suit different needs. For example, you could have a decreasing term policy to cover your mortgage and a whole life policy to cover the period after your mortgage ends.
Think of your priorities when taking out life insurance. Is it primarily to cover your mortgage, or do you want to guarantee a good lifestyle for your family after you've gone?
If in doubt, speak to a financial adviser who will be able to help you.