What type of life insurance do I need?
Life insurance policies come in multiple forms, and the type you need will depend on a number of factors – before you take out life cover, ask yourself:
- How long do I need cover?
- How big a pay-out do I want?
- Who is the policy for?
How long do I need life insurance cover?
When you take out life insurance consider how long you need the cover to last – some policies will cover you for the whole of your life, while others only for a set amount of time. However there are also different types of term policy depending on what you would prefer to happen once the time period ends.
Whole-of-life policies
A whole-of-life insurance policy offers protection for your lifetime, from the moment you take cover out until you die – when there will be a guaranteed pay-out. As you might expect, this type of life insurance is much more expensive than other types of policy which last for a set time period.
Term policies
A term policy only covers you for a specific amount of time, during which your insurer will pay out to your dependants if you pass way. If the term ends and you’re still alive, the policy simply lapses and you won’t get anything else out of it.
- Renewable: A renewable life insurance policy lets you renew your cover when the initial term expires without having to undergo another health review – though the premiums you pay are subject to change if you do
- Reviewable: Reviewable policies are generally fixed for around five years, and can be reviewed at any point afterwards by the insurer – after which your premiums may rise depending on any changes in your circumstances
- Convertible: Also known as convertible-term life insurance, this type of policy lets you switch your plan to a whole-of-life insurance policy, even if there have been changes to your circumstances. If you do convert to whole-of-life cover, your premiums will almost certainly increase as this way you’ll have a guaranteed pay-out
What kind of pay-out do I want?
You should also consider the kind of pay-out you want your beneficiaries to receive from the policy once you’ve passed away.
Level vs decreasing vs increasing term
If you’ve taken out a term policy, you’ll usually choose between level, decreasing and increasing term cover.
- Level term: A level term life insurance policy pays out a fixed lump sum if you die during the policy term. The amount won’t change over the policy term, so your beneficiaries will know exactly what to expect from the pay-out
- Decreasing term: Decreasing term life insurance offers a pay-out that shrinks throughout the course of your policy, usually in line with repayments on a mortgage or other debt – this is why they’re also known as mortgage life insurance policies
- Increasing term: Sometimes referred to as index-linked term life insurance, these policies pay out a sum that rises either by a fixed amount each year, or in line with the retail price index – this way the pay-out amount maintains its real value throughout the policy term
Life insurance in trust
If you write your life insurance policy ‘in trust’ the sum is paid directly to your beneficiary, rather than becoming part of your estate. This can help speed the process up so your beneficiaries get their pay-out quicker, while the sum isn’t subject to inheritance tax.
Family income benefit
Family income benefit policies pay out a regular monthly income to your beneficiaries from the date of the claim to the end of the policy term. The total amount paid out by the insurer is generally lower than under level or decreasing term policies, so the monthly income wouldn’t be enough to pay off an entire debt – but it could help stay on top of monthly mortgage payments or rent. As the pay-out is generally lower, the premiums are too.
Who needs life insurance cover?
The most suitable type of life insurance policy for you will also depend on your own personal circumstances.
Single vs joint
If you’re in a couple you might decide to take out a joint life insurance policy – but keep in mind the pay-out structure of joint life cover works differently.
- First death: A first-death policy pays out after the first policy-holder passes away, which ends the policy term. The second policy holder is then left without cover, and might find it harder to take out a new policy as premiums get higher as you get older
- Second death: Second-death joint life insurance pays out when both policy-holders pass away. They’re usually only offered as whole-of-life policies as they offer a guaranteed pay-out to the beneficiaries once both policy-holders have died – as a result they’re the more expensive option
If both policy-holders die at the same time the pay-out forms part of your estate – though as mentioned above, if you write the policy in-trust the pay-out goes into a tax-free trust fund passed directly onto the beneficiaries.
Over-50s life insurance
As you might expect, life insurance generally becomes more expensive the older you get as your risk of passing away increases. However some providers offer specialised cover for people aged 50 or older, so these groups can find affordable life insurance.
Over-50s life insurance policies offer guaranteed acceptance, so you’ll be able to get cover regardless of your current health or lifestyle. They also offer a guaranteed pay-out providing:
- You survive the qualification period: Over-50s policies often come with a qualification period known as a moratorium, which lasts between one and two years. If you survive this period your beneficiaries will receive the full amount, but if not the pay-out will be based on the amount you’d paid in until then
- You don’t miss any payments: So long as you keep up with your payment schedule your beneficiaries will get their pay-out. But if you miss a payment the policy will lapse – you’ll no longer be covered and you won’t get any return from your previous payments
What is critical illness cover?
Critical illness cover is something you can add to your existing life insurance, and it pays out if you’re diagnosed with a specific medical condition during the policy term. When you add it to your life insurance policy, it’ll be in the shape of additional or combined cover:
- Additional critical illness cover: An additional critical illness cover policy means you’ll get a pay out if you become critically ill AND if you pass away during the term of your policy
- Combined critical illness cover: A combined policy only pays out once – either if you’re diagnosed with a critical illness OR if you pass away during the term of your policy
MoneySuperMarket offers the option of taking out additional critical illness cover as part of your life insurance, as we believe this offers a more flexible and comprehensive solution than a combined policy.
What is terminal illness cover?
Terminal illness cover is entirely different to critical illness cover, and is often included as part of standard life insurance. It means the policy will pay out if your doctor confirms you have a terminal illness and are likely to pass away within 12 months – while critical illness is intended to cover you for a health condition from which you could recover.
Compare life insurance quotes
Finding the right life insurance policy is easy when you compare quotes with MoneySuperMarket. Just tell us a little about yourself, your circumstances and the cover you need and we’ll put together a list of quotes tailored to your requirements.
You’ll be able to compare deals by the overall cost and the cover you’ll get, and once you’ve found the one you want just click through to the provider to finalise your purchase. As with all insurance products remember the cheapest option isn’t always the best – we recommend balancing cost and cover to ensure you have the right policy in place.