The different types of life cover policies in the UK
Understanding life insurance is important before you go out and get a policy – yet some of the most basic things are wrapped in jargon and mystery. Here to help you out, we have a guide to the four types of life insurance policies available.
Life insurance is divided into two halves – the type that is guaranteed to pay out when you die, whenever that may be, and the type that only covers you for a portion of your life. There are a few pros and cons to both:
The pros and cons of whole of life insurance
Your family are guaranteed to get a payout
Easy to understand
Premiums for high payouts can be expensive
The pros and cons of term insurance
Very affordable premiums
Premium to payout ratio is very good
Can be easily configured to your specific needs
When the term ends, you are no longer insured
It could feel like money being paid into a void
Really, there is no ‘better’. The different types of insurance work to provide the right package in the right circumstances so there are situations where whole of life cover is definitely the better product, and others where you’d be crazy not to opt for a term policy.
Whole of life insurance is best when the reason for the payout has nothing to do with a temporary (even long-stage) period of your life - for example, raising a family. In situations where the need for the money has an expiration date, term life insurance is considerably better value for money.
There will be funeral costs and other expenses associated with your death, no matter when you pass away. It doesn’t matter if you are 21 or 101, these costs will arise. For this reason, whole of life insurance is better suited to the purpose.
Paying for a mortgage
A mortgage has a finite time set into the contract – after 25 years (or whatever your term is), the mortgage will be paid off. Term insurance is far better placed to provide security over a mortgage.
Paying for children
Worrying that your children will have the money to support them through their early life and education is common for many people. However, eventually your children grow up and become financially independent and you no longer need to provide for them. Term insurance, where the end of the term is set to your youngest child’s 21st birthday, is perfectly designed to provide financial security for your children.
Covering inheritance tax
The idea that your home or another significant part of your estate may have to be sold in order to pay for the estate’s inheritance tax upon your death can be troubling, as is placing the burden of a significant tax bill onto your heirs when you pass away. Using life insurance to cover the inheritance tax bill by having it pay into trust set aside for this very purpose is an excellent strategy and requires a whole of life policy – after all, your estate doesn’t become exempt from inheritance tax at any point.
There are four types of life cover, two for term insurance, two whole of life variants.
Whole of life insurance: whole of life variant #1
Often called whole of life assurance (assurance technically means that the policy is guaranteed to pay out (it is assured) as it is when there is no end term), standard whole of life cover is an easy-to-understand basic policy. You pay a premium monthly from the start of your insurance until either when you die, or (for some policies) until you pass 80. You are then covered for the whole of your life, no questions asked.
The simple benefit of whole of life insurance covering you forever is obvious - however, this type of assurance comes with significantly higher premiums than term-based cover.
Over 50s: whole of life variant #2
Over 50s cover is a guaranteed acceptance version of whole of life insurance that is offered only to those past their fiftieth birthday. Importantly, over 50s life insurance comes with no medical check or any health questions, meaning you can get cover even if you have a pre-existing or current medical condition.
Over 50s cover is more expensive than standard whole of life insurance but the lack of the medical questions is a huge benefit to many, especially those coming to life insurance late in life who just want to protect their loved ones from the cost of a funeral.
Level term life insurance: term variant #1
Level term life insurance gives you a large level of cover for affordable premiums with the caveat that at some point, the cover will simply end. Level term insurance is perfect for having a security cushion that can look after your family in the case of your early death. Payouts are often in the hundreds of thousands of pounds range, and policies are typically tied with critical illness cover and income protection to provide a full package of personal financial cover.
The most common of all the types of insurance policies, level term life insurance is the right choice for most people in the mid-part of their life with a family to consider and significant bills that couldn’t be covered without their salary.
Decreasing term life insurance: term variant #2
Almost exclusively used to cover mortgage payments, decreasing term life insurance payouts drop over the length of your term to match the amount left on a mortgage, meaning that should you call on the policy close to the end of its time, the value will be significantly less than it was at the beginning (but still perfect for ensuring the house is paid for).
Many mortgage providers insist on decreasing term life insurance as part of the conditions of the mortgage – and they may offer it as part of the mortgage package. Be careful, as it is unlikely you will receive the best life insurance policy in the UK if you simply take their recommended cover without shopping around. While you might be obliged to have cover, you remain able to choose the provider yourself.
We have a great range of articles here on Bobatoo to provide you with unbiased advice regarding life insurance and its associated products.
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