Often life insurance can be called term assurance but there are actually four different types of life insurance policy available.
This guide provides information on these different life insurance types to help ensure that you buy the cover that best suits your situation. All life insurance policies are eligible for payment upon death but policies can vary in payment frequency, policy maturity and the consistency of the sum insured over time.
Please note that a critical illness policy can be added to the life insurance types below except for a whole of life policy.
Level Term Life Insurance
Level term insurance is the most basic type of life insurance. Also known as basic term assurance, this policy type pays out a fixed lump sum upon death. With this life insurance type the term of the policy is also fixed at the start of the contract.
For example, a policy lasting 20 years written on £100,000 will payout £100,000 if the policyholder were to die at any time during the 20 year policy period. The most common uses for level term insurance are basic family financial protection or to cover an interest only mortgage loan.
Decreasing Term Insurance
Decreasing term insurance as with level term insurance has a fixed cover period, say 20 years. The main difference between level term and decreasing term insurance is that the level of cover declines over the life of the policy.
For example, at the start of the policy £100,000 might be covered for 20 years but half way through the policy term the level of cover may have fallen to say £50,000.
The most common use for decreasing term insurance is to cover a repayment mortgage, so that the sum insured mirrors the principal outstanding on the mortgage loan.
Some individuals also opt for decreasing term insurance if they believe that their financial liabilities will reduce over time, possibly as their savings rise or their children leave home. Naturally, because the amount insured falls over time the decreasing term life insurance type is less expensive than level term cover.
Family Income Benefit
The family income benefit type of life insurance is different to level term cover in that the payout is monthly over the course of the policy rather than being paid as a lump-sum upon death. If your family have consistent monthly obligations, such as loan repayments and expenses for necessities, then a family income benefit policy can formally structure what you leave behind.
For example, if you calculated that your family would need £2,000 per month should you die then the family income benefit policy would pay that sum each month to the end of the policy term should the worst happen at any time during the cover. This type of life insurance is often less expensive than a level term policy as the liability for the insurer is spread over time rather than being paid in one lump sum upon death.
Whole of Life Insurance
Guaranteed whole of life insurance is similar to the level term life insurance type in that the sum insured remains fixed. The main difference with this type of life insurance is that the term of the policy is equal to the life of the policyholder.
This means that a whole of life policy is guaranteed to payout at some point in the future, thus your family are ensured to receive financial support when you pass away. For example, suppose you insure £100,000 today your family will be guaranteed to receive £100,000 when you die, whenever that time comes.
For further information about life insurance types and their regulations visit the Financial Services Authority’s ‘money made clear’ life insurance section.
