Types of Life Insurance
What are the various kinds of life insurance and which type do I need?
A lot of people think life insurance is a singular thing, but of course, like most products (both financial and not), there’s a range of options and customisable differences that can make one life insurance policy perfect for you and perhaps completely unsuitable for someone else.
In this guide, we look at the different types of insurance policies available to give you a better idea of what might be the best life cover option for you.
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Life insurance is there to provide for your loved ones when you die.
From the outset, it should not be seen as something that benefits yourself, but purely as a security blanket for your family and loved ones. While there are additional products that are more specifically designed to help you should you become critically ill or find yourself unable to work, life insurance itself is clear cut – it pays out upon your death and not before.
Are you at the start of your career path, single and carefree? Do you have a young family and a new mortgage? Are you approaching retirement with the kids all grown and flown?
Understanding your current life situation is vital to getting the best from your life insurance. Take a look at the following questions and some types of life insurance that may be suitable:
Are you without dependants?
People with no family often believe that life insurance isn’t for them, but they miss out on two key facts:
- One, that someone must pay for the expenses associated with a funeral and even if they believe themselves completely independent, they could be putting huge pressure on their parents in a time of turmoil;
- Two, that getting life insurance at an early healthy age is going to save them thousands in the long run. Life insurance premiums are set at the time of application, which means if you are a young 20-something at the peak of your health and without any vices (such as smoking or drinking alcohol) then your premiums are going to be astonishingly low and will stay that way as you get older and (perhaps) slip a little with the healthy lifestyle.
Getting life insurance early on is incredibly affordable and can guarantee substantial protection for years without really making a financial impact to your earnings.
Suitable life insurance types include - level term life insurance set to last until retirement age, or whole of life insurance to become a lifelong investment for financial security for any future family.
Do you have a young family?
Providing for a young family after a death has occurred becomes a serious consideration for anyone who has recently stepped into the wonderful world of parenthood. Children need substantial financial investment in order to live a happy life and reach adulthood with as much opportunity as parents would wish. Daily expenditures such as food and clothing can mount up, plus the desire to provide for them on a greater scale at important times in their life is considerable – for education, helping with a first car, a deposit on a house or for marriage. Perhaps you simply want to give your children a cash inheritance for them to use when they become adults to kick start them in whatever direction they choose to follow.
Having your salary disappear from your family’s income is simply devastating. Life insurance makes sure it is immediately replaced and that all their needs (from the mundane to the extravagant) can be provided for.
Suitable life insurance types include – level term life insurance set to end on your youngest child’s 21st birthday, or until you retire provides the perfect solution for a family. With a policy set to ten times your annual salary, you can rest knowing that at least a decade after your passing exists without worry.
Do you have a mortgage?
Providing cover to ensure that your mortgage is paid off in the event of your death means that your family can focus on grieving in an already-upsetting time, rather than having to find the money to pay off the mortgage as well.
Suitable life insurance types include – decreasing term life insurance. This specialised level of cover provides an affordable policy that’s tied to the remaining value of your mortgage, meaning it will be paid in full if you pass away.
Do you worry about inheritance tax?
If you have a valuable estate that you will leave behind for your family, then the government may require inheritance tax to be paid – and unfortunately, they are not always lenient with this. Many families can find themselves unexpectedly hit with inheritance tax because the house you left to them exceeds the nil rate band value (under which it is exempt from the tax). Unless they have available funds to pay the bill, they may be forced to sell the home and downsize to a cheaper property elsewhere.
By having life insurance in place specifically dedicated to paying the inheritance tax bill you can make sure your family is able to keep their home even with HMRC knocking on the door.
Suitable life insurance types include – whole of life insurance paid into a trust fund that’s set aside for inheritance tax. This type of insurance when paid into trust is outside your estate and thus won’t find itself subject to its own hit of inheritance tax!
Are you self-employed?
Without a larger company backing you up with perks such as death-in-service or substantial pension plans, families of the self-employed are particularly vulnerable to financial hardship following a tragic and unexpected accident.
Suitable life insurance types include – level term life insurance set to end when you see yourself choosing to retire, or whole of life insurance to cover you no matter how long your passion for work keeps you thriving.
It’s also worth considering some of the many life insurance sister policies, such as income protection for the self-employed, to hold your hand through any times of sickness and working difficulties.
Are you retired?
With the kids gone and the heavier obligations all paid up, retirement is a time for enjoying yourself and getting to do everything that life has been promising, however, it doesn’t mean you are without financial responsibility. Planning for your death and making sure no one else has to field the expenses for your passing is a typical concern for those in their retirement, but pre-existing medical conditions or simple poorer health due to age can make the idea of life insurance a far-distant dream, especially if you haven’t taken the opportunity to set anything up earlier.
Thankfully, insurers understand the need for specialist policies and have suitable over 50s life insurance cover which has a guaranteed acceptance policy and asks no medical questions.
Suitable life insurance types include – whole of life insurance or over 50s cover. Both whole of life insurance and over 50s life insurance are designed perfectly to cover things such as funeral expenses, but if you have any pre-existing medical conditions then over 50s offers a no-questions-asked level of acceptance for a slightly higher premium over the standard whole of life assurance.
The different types of life insurance mentioned above fall into two categories – term insurance policies, and lifetime assurance policies.
Term insurance has an end date, at which time the policy is considered complete. It is most suitable for insuring you while you have a specific financial commitment that will one day end – for example a mortgage, or children at home.
Lifetime assurance policies continue until you die, no matter when that is. Some require you to continue paying for the whole of your life, while others cap payments at a specific age (for example 80, or 85) after which the cover continues but you no longer need to keep up with premiums.
Which is better – term or whole of life insurance?
There’s no better or worse, simply one that fits your needs and one that doesn’t quite hit the mark. Getting the best life insurance policy in the UK is about understanding your personal circumstances and customising your life insurance package around your life, not simply picking from two binary options.
Life assurance vs. insurance
Often, insurers will use these two terms interchangeably, but there is a subtle difference – assurance refers to policies that are ‘assured’, which is to say they will definitely pay out at some point, while insurance covers you against a certain thing from happening. In simple terms, whole of life cover is assurance (your death is, unfortunately, guaranteed and thus the policy will eventually pay out), whereas with term policies, insurance is a better term.
The four main types of life insurance
- Whole of life insurance – an assured whole of life policy that will pay out when you die, no matter when that is.
- Level term life insurance – a life insurance policy that lasts for a set time. Level term policies tend to have a large payout (called the sum assured) and are cheaper than equivalent whole of life policies due to their limited timeframe.
- Decreasing term life insurance – a term life insurance policy with a sum assured that decreases each month in line with a mortgage or other long-term debt. Decreasing term life insurance is typically the cheapest of the four types.
- Over 50s insurance – an assured whole of life level of cover with guaranteed acceptance and no medical questionnaire that can only be applied for by those over 50.
While life insurance is there to protect your family upon your death, other products from life insurance companies exist to help you throughout your lifetime. Two of these, critical illness cover and income protection, are considered essential for many working people as they help pay for your family should you become unable to work.
For more information on these additional products, give us a call today at Unite Life or read our various related resources.
At Unite Life, we understand all aspects of life insurance so that we can help you get the product that suits you and your budget. Our advisors are all fully trained life insurance specialists that can give you impartial advice and help you choose an insurer from a huge range of the top names in the UK.
Give us a call today or fill out our contact form to talk to one of our team today, obligation-free!