What types of life insurance are there and what are they for
Getting the right type of life insurance for you and your family can be one of the most important decisions you will ever make. The major problem with this decision however is, if you get it wrong you will probably not know until you have died and it is too late. So this article has been written with the hope that it’s a clear breakdown of the cover available to you will help you to make the right choice now and see you right in the future.
There are two main types of life insurance on the market. Although many more types exist, these other types are extremely specific and will probably not apply to you, so we will deal with the main two for now. The two types you are best to concern yourself with are known as Term Insurance and Whole of Life Insurance.
Whole of life insurance is fairly self explanatory and the easiest to explain, as it essentially insures you for the whole of your life. You specify an amount for which you want to insure your life, and you then agree to pay into an insurance policy a certain amount every month until your final day comes in whatever shape or form. You can feature in to this policy “indexation”, which means that your policy performs in line with inflation. This can be extremely useful as the value of money has a big tendency to change over time. At the end of the day, you don’t want to be paying good money into an insurance policy for a specified amount only to discover that when the time comes, that specified amount can barely get your family through to the end of the next week.
The main reason that you would decide to choose whole of life insurance is for the protection of your family. You want to make sure that in the event of your death there is a sufficient amount of money saved for your family to be able to reinvest and provide an ongoing source of income for the future when you are no longer there to provide for them. The downside of this form of insurance is that because it runs for the whole of your life, it is not the cheapest option available. It is, however, the only one that guarantees a cash payout at the end of your life.
The other main type of life insurance comes in many different forms, but all of these forms are known as Term Insurance. This basically means that the policy runs for a specific length of time, which can be anything from 1 year up to 60 years. Once you have decide the time frame, you then decide the amount of money you want to insure, and then you can work out what you pay in each month. It’s as easy as that. If you die within the timeframe the policy pays out, if not the policy ends and that’s it. Indexation can also be included in this sort of life insurance policy, performing exactly as explained before.
As I have said, term insurance comes in several forms. We have level term insurance, decreasing term or mortgage protection as it is sometimes known, family income benefit also called family income plans, convertible term and last but not least renewable term insurance. I will try to shed some light on these in the following paragraphs.
The first is decreasing term or mortgage protection insurance. Like any term insurance plan, this plan runs for a set length of time. The difference here though is that the amount insures reduces as each year passes. This is because of what money you are actually insuring. This type of insurance is usually in conjunction with a repayment mortgage. With this sort of mortgage you gradually pay off the whole amount of the loan, so the remainder to pay off reduces each year. Therefore you only need to insure against the amount you have left to pay. The benefit is that the premiums for 100,000 which decreases year on year are much cheaper than for 100,000 on level term. So if you have a repayment only mortgage, this could be the policy for you.
Next on the list of options is Family Income Benefit. This is a relatively new sort of life insurance policy, aimed at providing bereaved families with a payout in the form of an annual income rather than a one off lump sum. The problem with one off payouts for families is that it is then up to them to reinvest the money in other areas in order to create an income for them. This can be traumatic and difficult for grieving loved ones. Family income plans take away this hassle. By insuring for a set income for a set amount of time, if you die before the end of the term, the policy automatically pays out that income to your family until the end of the term.
The last two types - convertible term and renewable term - are very similar in that they both allow you to alter the terms of the policy providing those alterations are made before the end of the term. The first one we will describe is a renewable plan. Renewable plans allow you to renew the policy at any time before the expiry date of the original term without any underwriting, or health checks. So a 10 year plan could be extended for 10 more years regardless of the state of your health, as long as you do it before the first plan expires.
The convertible plan takes it to another level. This sort of plan lets you convert the original policy from term insurance plan to whole of life, as long as it is done within the time of the original term. The reason you may want this option is if you couldn’t afford a whole of life policy at the start but find yourself in a position to take one out later. Convertible policies allow you to change to whole of life when you can without having to undergo any health checks.
You need to be aware with the two plans above there is a cost the plans are more expensive than ordinary term insurance and when you come to exercise the conversion or renewal option you will be paying the premium due to someone of your age at that time taking out cover at that level, so you are not really getting something for nothing, it is more about ensuring you have cover regardless of what happens to your health over time.
So now you are hopefully a little bit more enlightened as to the different life insurances out there available to you. Nevertheless, it is strongly advised that you should consult an expert before making any decision, for as we know, the wrong decision can go undetected until it is too late to fix.