Life insurance is there to give you peace of mind, safe in the knowledge that should the worst happen to you or your partner, your family would be financially secure.
There are different types of life insurance policies available, with varying levels of cover, and the price of premiums can vary greatly.
Which life insurance do I need?
The right life insurance policy depends on your individual circumstances. Before you find out which life insurance is the best option for you, it’s important to think about:
- How long do you need the protection to last for?
- How much do you want your life insurance to pay out?
- How much can you afford to pay in premiums?
What is the difference between 'term' and 'whole-of-life' options?
When looking at life insurance, there are two main categories of life cover: term insurance and whole-of-life assurance.
Term insurance is the most popular kind of cover because you can set it for a certain time frame. It pays out a lump sum or a monthly income if you or your partner die within this set period. If you don’t die, the policy simply lapses and you get nothing back. It’s a way of financing your family or loved ones after you death.
Whole-of-life assurance, as the name suggests, offers protection for your lifetime until your eventual death, whenever it occurs, and therefore premiums are much higher. But there is a guaranteed payout whenever you die, which can be used by your family to pay for funeral costs, and anything else they might need to do.
Average quoted premiums for level life insurance, according to MoneySuperMarket data. Correct as of April 2018.
Types of life insurance
There are several types of term insurance, from level term to decreasing term, so it’s important to understand which is likely to suit your needs best.
- Level term insurance: Pays out a fixed lump sum if you die during the policy term. This lump sum won’t change over time, so you and your family know exactly what will be left with in the event that they need to claim.
- Increasing term insurance: Designed to combat rises prices and inflation, the sum insured maintains its real value throughout the term. It is also known as Index-linked term life insurance and the sum either increases by a fixed amount each year, or rises in line with the Retail Prices Index (RPI) measure of inflation.
- Decreasing term insurance: Covers a debt that gradually reduces over time, such as a repayment mortgage. It is worth considering decreasing term insurance if you have a mortgage or any big debt you would need to pay off in the event of your death. With this type, any pay-out also reduces over time, which means the premiums are understandably lower than for level term insurance or increasing term insurance.
- Convertible term insurance: As its name suggests, convertible term insurance enables policyholders to convert their policy into a whole-of-life policy should they wish to. Good news is that the insurer is obliged to convert the policy regardless of any changes to the policyholder’s health.
- Renewable term insurance: With renewable term insurance, policyholders have the option to renew their life cover when the policy term finishes without the need for a health review.
Single or joint life insurance?
If you are married or have joint financial commitments with a partner, or even a relative, you may want to consider a joint life policy rather than two single policies. This type of life insurance tends to be cheaper than if you had two separate plans, but it pays out when the first policyholder dies. After this, the joint life insurance cover ends.
This means that if the remaining partner wishes to remain insured, they need to look for another policy. Unfortunately, this often means they may be much older and therefore premiums will be considerably higher.
If you opt for two separate single policies, the surviving person will still have life cover in place even after other person dies. Additionally, in the event of a relationship breaking down, you won’t need to negotiate over splitting up the policies, as each plan is separate from the other.
Family income benefit
A family income benefit policy will pay out a monthly income of an agreed amount each month from the date of the claim to the end of the policy term.
Typically the insurer would pay out less than with a level term insurance plan, so the premiums tend to be lower. This type of policy would not enable you to clear a capital debt such as a mortgage but it could pay a monthly mortgage payment or rent.
As the name implies, a whole-of-life-insurance policy provides cover for your entire lifetime and guarantees a lump sum payment when the policyholder dies – provided premiums have been continuously paid throughout the policy. As usual, the proceeds of the policy will go to the policyholder’s family or beneficiaries of their estate. Premiums are high because a claim is seen as inevitable.
This kind of policy is often taken out to cover future inheritance tax bills, which is payable at 40% on the value of your estate over £325,000 (for the tax year 2018/19), including your property and all other assets.
According to MoneySuperMarket data from January 2018 to March 2018, correct as of April 2018
Different types of whole-of-life policies
Non-profit whole-of-life policies: Similar to term insurance policies, in that there is no investment element, and premiums are fixed. Policyholders receive a cash lump sum on death.
With-profit whole-of-life policies: Include an investment element, so that the pay-out on death is the sum assured, plus any investment profits allocated to the policy.
With-profits plans aim to smooth out the peaks and troughs of stock market volatility by retaining investment returns built up in good years. This means payments can be topped up in bad years. Any bonuses are intended to be added yearly to the basic sum assured – with a possible final bonus paid at the end of the term.
However, in many cases with-profit policy investments have performed poorly, and as a result are much less popular than it used to be.
Low cost whole-of-life policies: Essentially a with-profits plan, which on death will pay out either the guaranteed death benefit or the value of the policy, whichever is highest.
Unit-linked whole-of-life policies: Incorporates an investment element where the monthly premiums go towards purchasing units in a selected fund. The policy grows in value as the number of units held increases. However, if investment growth is poor, premiums will increase.
Most whole-of-life policies guarantee that your premiums won’t change for the first 10 years. But if you opted for a “reviewable policy”, your cover could be renewed after the 10-year period finishes. This means premiums could rise to ensure the policy will be able to pay out the expected lump sum.
Your provider will look at the way in which any underlying investments have performed up to that date, to decide if they need to up your premiums. It will also consider your circumstances, such as health and life expectancy.
If a policyholder is unable or unwilling to increase the amount they pay for cover, they can either cash in the policy, or accept the policy will provide a smaller sum than they had anticipated at the outset. Remember that if you are considering a whole-of-life policy, there is a risk that you will pay more into the policy than you will end up getting out of it.
Only “non-reviewable” policies have fixed premiums which will not change over time, but these premiums are likely to be more expensive, at least initially, than the premiums you will pay for reviewable cover.
Over 50s plans typically promise a relatively small pay-out, and are generally designed to cover funeral costs. Premiums are usually guaranteed for life, and pay-outs are small (typically between £1000 and £5,000) depending on what you pay each month and for how long.
However, those buying these policies can find they end up paying far more than the policy will ever pay out when they die, especially if they live a relatively long time. If, for example, you buy a £10,000 policy at 50 and it costs £25 per month, but you live to be 84 years old, you will have paid more than £10,000 into the fund. The problem is that you must keep on paying the policy or you lose cover and you can’t get the money back.
Endowment life insurance policy
An endowment policy is effectively an investment scheme with life insurance attached. This type of plan used to be popular with interest-only mortgage holders who used them to build up savings with which they could repay their mortgage capital.
Policies can be either with-profits, where bonuses are added to the policy, and once added are guaranteed, or they can be unit-linked, where premiums are invested in investment funds whose value can move up and down, with no guarantees attached.
Save money on life insurance
There are a number of ways that you can save on the various types of life insurance:
- Don’t smoke. Life insurance for smokers is far more expensive
- Don’t wait to buy a policy. The older you start your life insurance cover, the more expensive your premiums are likely to be
- If you can’t afford rising premiums, you should consider avoiding increasing term life insurance
- Think about whether a joint or single policy will be the most cost-effective for you in the long term
- Always compare quotes
Compare life insurance quotes
You should always compare a wide range of different life insurance quotes to ensure you find the best possible deal to suit your needs. You can compare various types of cover to see how it impacts premium prices, and see whether you want to add critical illness cover to your policy.
Remember, however, that you shouldn’t base your decision to buy life insurance on price alone. It’s also important to check the level of cover and to understand whether or not your premiums could rise in future. And as ever, always read the small print.