What different types of life insurance are available?
The first time many people think about taking out life insurance is when they first take out a mortgage. And to the uninitiated, the variety of life insurance policies that are available can make picking the right one a little daunting. In this article, we’ll explain the main types of life insurance available and what kind of customer they might be best suited to.
What is life insurance?
In simple terms, life insurance is a financial product that could you mean your loved ones receive a sum of money if you were to pass away while covered by the policy. It is also referred to as ‘life insurance’, ‘term insurance’, ‘life assurance’, or any combination of these names.
When taking out life insurance, you start by choosing how much cover you would need to, say, cover your mortgage in the event of your death. You also specify how long you’ll need cover for, which, in this example, would be for the duration of your mortgage. You then pay a monthly amount, the premium, to provide your cover. If you die during the length of the policy, the policy pays out to your beneficiaries. If you don’t die, there is no cash value. So, you shouldn’t think of life insurance as an investment product. It’s more about providing you with peace of mind.
What’s the difference between level and decreasing life insurance?
There are two types of life insurance you’re most likely to come across. Life insurance (also known as level life insurance) could pay out a lump sum if you die during the specified term. The amount you’re covered for and the premiums you pay remain level throughout the term unless you change them. With decreasing life insurance the amount you’re covered for decreases over the length of the policy. It’s designed to work with repayment mortgages, the amount shrinking over time, roughly in line with what you owe on your mortgage.
Should you choose single or joint life insurance?
Both the single and the joint life insurance policies have their own pro's and con's, so if you're considering the options think about your own needs and budget. Here are a few factors you should consider:
- Budget - one joint insurance life policy could be more affordable than two single life insurance policies (this would depend on personal circumstances).
- Cover - do you both have exactly the same life insurance need? Would one or two plans be the most appropriate?
- The future:
- if a relationship breaks down, it's possible that an insurance provider would not be able to divide a joint life policy into two single policies.
- if you claimed against a joint life policy, the surviving person would be left without life cover. Applying for life insurance later in life can be expensive because premiums increase with age.