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Types of life insurance

What are the different types of life insurance?

published: 04 October 2022
Read time: 15 minutes

In this guide, we’ll outline the different types of life insurance available along with the benefits of each so you can decide which one is right for you.

If you are thinking of taking out life insurance, you might be surprised to find out that there are several different types of policies to choose from. The type of policy you choose can make a big difference to your cover, so it’s important to know your options before you buy.

What are the different life insurance types? 

Term 

Term life insurance policies have a limited lifespan. There are different types of term life insurance policies that you can choose from. These different types determine how your pay-out and premiums will change over time. 

Level term 

Level term life insurance has a fixed lump sum that doesn’t change during the life of your policy. This type of life insurance can be a reassuring and safe option because you’ll always know exactly what it will pay out if a claim is made. 

Decreasing term 

Decreasing term life insurance offers a pay-out that shrinks throughout the course of your policy. This type of life insurance normally has a fixed term so that your policy ends once the pay-out has decreased to zero. Decreasing term life insurance is usually used to pay off a debt like a mortgage, so the rate of decrease should match the rate at which your mortgage debt shrinks as you pay it off. This is why this life insurance type is also known as mortgage life insurance.  

Increasing term 

Increasing term life insurance policies have a pay-out that increases over time. This increase can either be done by adding a fixed amount to your pay-out each year, or by linking the pay-out to the retail price index (sometimes this life insurance type is referred to as index-linked life insurance). This type of policy can have its drawbacks. For starters, increasing term policies usually only have a fixed term. They can also be more expensive, and premiums may increase over time. However, people choose them because it means that the value of the pay-out doesn’t decrease over time because of inflation. 

Joint life 

Joint life insurance policies will cover two people under one policy, which is a good option for parents and couples. However, it’s important to know that the pay-out structure of a joint policy is different than normal life insurance. 

  • First-death: A first-death policy will payout once the first person passes away. After this, the policy will end and the surviving person will be left without cover.  

  • Second-death: A second-death policy will pay out once both policy holders have passed away. These types of policies are usually only offered as whole-of-life as they have a guaranteed pay-out. 

Joint policies can be a cheaper option for couples rather than taking out two independent policies. However, there can be some drawbacks. For example, if you take out a first-death policy, the surviving member of a policy once it has ended may find it difficult or more expensive to take out cover because the cost of life insurance increases as you get older. 

Over 50s 

Life insurance becomes more expensive as you age, or in some cases providers may not be willing to cover you once you reach a certain age. To overcome this problem, some insurance providers offer special over-50s life insurance policies. These policies will usually have guaranteed acceptance, so they are available to everyone, no matter your age or medical history. They also offer a guaranteed pay-out providing: 

  • You survive the qualification period: Also known as a moratorium, this period lasts between one and two years, starting from when you take out your policy. If you survive this period, your beneficiaries will receive the full amount of your cover. If not, the pay-out will be based on the amount you paid into your policy up until your death. 

  • You don’t miss any payments: If you stop paying your premiums, your policy will lapse. This means you will no longer be covered, nor will you get any return from your previous payments.  

This type of life insurance can be more expensive than others or be limited in terms of cover, so it might not be right for everyone. However, if you are over the age of 50 and want to leave something for your loved ones to cover funeral costs or simply as a gift, it’s a good option to consider.  

Whole of life 

Whole-of-life insurance policies offer protection for your whole life. Cover starts when you take out the policy and ends when the policy holder dies, with a guaranteed pay-out as long as you continue paying your premiums. This type of life insurance is more expensive than term policies. 

There are two types of whole-of-life policies you can choose from – balance cover and maximum cover. 

Balanced cover 

With balanced cover, you can ‘lock’ the size of your pay-out and your premiums when you purchase your policy. This means that the cost of your policy stays the same for the rest of your life.  

This is type of policy isn’t the best choice for everyone because it is one of the most expensive types of life insurance policy. If you take out this type of policy when you are young, you might also be at risk of paying into your policy more than what your pay-out is worth. 

Maximum cover 

With maximum cover, on the other hand, your premiums can change over time. This is because your insurance provider will link your policy to an investment fund with the intention of using the returns of the investments to cover the cost of your pay-out. Depending on how the fund is performing, you provider may either increase your premiums or reduce your pay-out to cover any losses. This kind of risk is the reason why maximum cover policies start out as being the cheaper option. 

At MoneySuperMarket, we specialise in helping you compare term life insurance quotes.

Mother, father and baby eating together at the table

What type of life insurance should I choose? 

Before deciding on which type of life insurance is right for you, there are a few things that you need to consider. 

  • Why are you buying life insurance?: the purpose of your policy will have a real effect on which options you should choose. For example, if you have a partner and want your life insurance to support your children, you can take out a joint policy that will cover both parents. Otherwise, if you want to gift your life insurance pay-out to your loved ones, you can link it to the retail price index so that it retains its value over time. 

  •  How much cover do you need?
    It costs more to get more cover, so it’s worthwhile to take some time and decide how much cover you need. If you are concerned about paying off a mortgage, you may want to factor that in when deciding on how much to gift your loved ones.  

  • How long do I need cover?
    You can decide how long you want your life insurance policy to last, and money can be saved on your policy by decreasing its term. By figuring out how long you need cover, you can avoid overpaying for a policy that you might not need. 

  • Who is the policy for?
    You can decide where your pay-out goes once a claim is made, and certain options can be chosen to tailor your life insurance to the circumstances of your beneficiary. For example, rather than a lump-sum, you might want to gift them with a monthly income. 

Once you have answered these questions, you can begin to think about which type of life insurance policy will best suit your needs.

Level term 

If you want to leave something for your loved ones, a level term policy may be the most appropriate for your needs. This is because the pay-out is reliable, and you’ll always know how much your loved ones you will get. However, it’s important to remember that the value of your pay-out will decrease over time, so it might not be the best choice if you want the pay-out to financially support your loved ones or pay off debts.  

Decreasing term 

Decreasing term policies are one of the cheapest life insurance options, so it may be one to consider if you are looking for affordable cover. Decreasing life insurance policies are also referred to as mortgage life insurance. With this policy type, the pay-out will diminish over time to match the value of a diminishing debt, like a mortgage.  

They can also be a good choice if you want to use life insurance to help your family support young children. Cover will decrease as they get older, becoming more affordable, and then can be set to end once they have reached financial independence.  

However, if you want to leave a gift to your loved ones with your life insurance pay-out or provide long-term financial support, other policy types may be more suitable for you. 

Increasing term 

If you what your life insurance to last a long time and retain its value, then you may want to consider increasing cover. Because it will keep up with changes in inflation, it can be used to help your loved ones cover bigger expenses in the future, like buying a home or growing their family. It can also help them cover funeral costs that are increasing year-on-year. 

It’s not the type of policy that you can buy on a budget, though, due to it being one of the more expensive options. You should also know that increases to your pay-out are matched with an increase in premiums.  

Whole-of-life insurance 

The guarantee of a pay-out is the most appealing aspect of a whole-of-life policy. Whole-of-life policies might be the right option for you if there are some serious financial commitments that you need to make sure your policy will cover. For example, you may have a family member that requires life-long care, in which case your insurance can be used to make sure that their care is continually paid for.   

Some people prefer a whole-of-life insurance policy because it saves them the trouble of taking out another term policy when theirs expires. Taking out life insurance at an older age usually means paying more, but with a whole-of-life policy, that isn’t a problem. 

However, if a whole-of-life policy is something you can’t afford but you still want your life insurance to last longer, a whole-of-life policy isn’t your only option. If you take out a term policy, there are some circumstances where you can extend the cover of your policy. 

  • Renewable Term: With a renewable term life insurance policy, you can renew your policy once it has reached the end of its term. You don’t have to undergo another health review when you renew your cover, however your premiums are subject to change and will likely increase for your renewed policy. 

  • Reviewable Term: Reviewable policies generally have a fixed term of around five years, after which they can be reviewed by your insurer. Your insurer may then increase your premiums depending on any changes in your circumstances. 

  • Convertible: Convertible-term life insurance allows you to switch your plan to a whole-of-life policy once you have reached the end of your policy’s term. Your premiums will increase if you switch to whole-of-life, but you now have a guaranteed pay-out. 

What type of life insurance pay-out should I choose? 

If you don’t name a beneficiary for your life insurance or make any special arrangements for how your policy will be paid out, the pay-out may end up going into your estate. This means that it will go through probate, which can delay it from going to your loved ones and part of it may be used to cover other expenses. 

To make sure your life insurance goes directly to the people who need it, you can use a trust to outline exactly who receives the life insurance pay-out. Alternatively, you can set up a family income benefit so that your policy pays out gradually. 

Life insurance in trust 

When life insurance is written in trust, the pay-out goes directly into a trust rather than going into your estate. This means you can avoid your life insurance going through probate and get it to your loved ones sooner. To do this, you need to make sure that you appoint a trustee to manage the funds and distribute them to the rest of your beneficiaries.

Family income benefit 

If you want your life insurance to be used to support your loved ones, you might consider a family income benefit policy. This type of life insurance will pay out a monthly income to your loved ones rather than a lump sum. Family income benefit life insurance can be a more affordable option to help your loved ones stay on top of repayments and day-to-day expenses. This is because this type of policy usually has a fixed term and pays out less than a standard life insurance policy.

Should I get life insurance with critical illness cover? 

Critical illness cover is a useful optional cover you can add to your life insurance policy. With this cover, you can claim on your life insurance policy if you are diagnosed with a serious medical condition during your policy’s term. The types of conditions that you are covered for will be outlined in your policy documents, but usually these consist of life-changing diagnoses, such as cancer. There are two ways to add critical illness cover to your life insurance policy: 

  • Combined critical illness cover: A combined policy will only pay out once – either if you are diagnosed with a critical illness OR if you pass away during the term of your policy. Once your policy has paid out, it will end and you will no longer receive cover. 

  • Additional critical illness cover: Additional policies have a chance to pay out twice during your policy’s term – once if you are diagnosed with a critical illness and again when you pass away. 

Critical illness cover is usually used to supplement a loss of income due to a diagnosis, or to help your loved ones cover the cost of care. If this is something that concerns you, it may be a worthwhile add on to consider. To find out more you can read our ‘Is critical illness cover worth it?’ guide. 

MoneySuperMarket are only able to help you find life insurance policies with combined critical illness cover. 

Terminal Illness cover 

Terminal illness cover is different from critical illness cover and is usually included as standard with certain types of life insurance. This cover will allow you to claim on your life insurance if you are diagnosed with a terminal illness and are likely to pass away within 12 months.  

Compare life insurance quotes 

Finding the right life insurance policy can be difficult when there are lots of providers to look at and lots of different life insurance types to choose from. That’s why we at MoneySuperMarket want to make the process easier. 

We’ll fetch quotes for policies tailored to you from UK providers for you to browse at your leisure all in one place. All you have to do is answer a few questions about yourself and the type of life insurance you want, and we’ll find great deals that you can apply for today. 

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