Ensuring that your loved ones are provided for, whatever happens, is essential. That’s why life insurance, in its earliest form, dates back as far as the Greek and Roman times.

Back in 600BC, ‘benevolent societies’ were set up to care for individuals with deceased family members. And over the centuries, the industry has expanded to protect a whole manner of financial assets.

This guide will run through some of the main types of life insurance products on the market. But please note, if you need further advice on Level Term, Decreasing, Single and Joint Life Insurance, take a look at our guides.

Please note: policies discussed in this article are for information purposes only. If you need advice on specific insurance products, please get in touch with an independent financial advisor.

How Does Life Insurance Work?

Life insurance protects your financial assets in the event of you or your partner’s death (if you share financial commitments, like a mortgage or children together).

It is a vital safety net for families and there are many types of life insurance products and levels of protection on the market. The amount of life cover you opt for will be dependent on the policy you choose, as well as your level of health and a range of other factors, such as weight and lifestyle habits.

A life insurance policy can provide:

• Payments towards your debts in the event of your death or inability to work.  
• A cash lump sum, or regular income, to provide for your family.

Do I need Life Insurance?

There is no legal requirement for a person to take out life insurance. It is highly recommended to those seeking a mortgage and may be a requirement, depending on the lenders you approach. But it is a wise thing to consider if you have the following;

• If you have dependents who rely on your income.
• If you have a partner or spouse with whom you share financial assets (such as a mortgage).
• You may choose to take out a life insurance policy if you would like to cover your own funeral expenses.
• You may also be a stay-at-home parent, who does not work. However, your time spent taking care of the children would need to be accounted for, if you were to die suddenly or fall seriously ill and you needed nannies or childminders.
• If you are a single person with a property, i.e. a major asset that could be given to a will beneficiary in the event of your death. Alternatively, a single person might need life insurance to take away the stress of paying off the mortgage, during the time your beneficiaries would be looking to sell the property.

Please note: Payment Protection Insurance works slightly differently to Life insurance, as it covers only payments towards your outstanding debts, with no payout to cover other expenses. A lender may encourage you to take out this form of insurance in conjunction with one of their loans. An independent financial advisor can answer any questions you may have about suitable insurance products to take out with a mortgage or other loan type.

I’m Single, Do I Need Life Insurance?

If you are a single person with no dependents or debts (like a mortgage) you may still wish to take out a form of life insurance policy. You may wish to cover your own funeral costs, in the event of your death.

Similarly, if you are leaving an inheritance to your loved ones, a life insurance policy can be used to move the funds from your estate and send them directly to your will beneficiaries. An independent financial advisor can help you with advice on this.

How Much Does Life Insurance Cost?

Life insurance is a vast industry, designed to cover every eventuality. Therefore, cheaper and more expensive policies are available. The main cost considerations to take into account when shopping for the best life insurance policy include;

• The amount of money you would want to leave as protection for your loved ones.
• The length of the policy term (this can vary from a few years to the whole of your life).
• Your health history (if you have a pre-existing medical condition, or if you’re overweight etc.)
• Your lifestyle (if you smoke, how much alcohol you drink etc.)
• Your occupation (if you are in the military, for example, you may be offered Death in Service cover).
• Your age (the younger you are, the cheaper your premiums would be, as a rule of thumb, but this may not always be the case).

What Types of Life Insurance Cover are Available?

Life insurance policies fall into two main types, Whole of Life Assurance and Term Insurance. One covers you for a specific period, the other can cover you for the rest of your life.

Within the two main types of life insurance products, policies fall into a range of sub categories;

Level Term Life Insurance

Level term insurance (also known as Level Term Assurance) is designed to protect you for the length of an agreed term. Should you die during the length of said term, you should know exactly how much you will leave behind to your loved ones.

These policies can be paid for in monthly premiums. However, if you die after the agreed level term, no payout is made.

Term life insurance policies vary and the premiums you pay for a certain product may increase as the term progresses. Make sure you are aware of this before you buy. Level term policies ensure that the costs for the term are fixed. However, some offers may have what is known as ‘low start,’ this means that the premiums are cheaper in the beginning and may increase over time. Going through an independent broker can help make the selection process easier, as an expert can make you aware of how your costs could change over time. 

What are the Benefits of Term Life Insurance?

• Cheaper Policies – As these policies are designed to cover a specific period, i.e. 25 years, then the amount you pay towards premiums, in many instances, is cheaper than other Whole of Life Insurance products.
• Level of Cover – With term policies, you set out the amount of money you would need to protect your family, in the event of your death. This could be a sum such as £100,000.
• Fast Protection – Say, for example, you were to take out a 25-year level term policy for £100,000 and you died within 6 months of paying premiums. With these products, you would expect to get the full payout. Similarly, if you died 23 years into your 25-year term, you would get your £100,000 payout. This is, of course, provided you keep up with your premium payments and the outcome will also be dependent on the insurer’s approval of your claim.

What are the Pitfalls of Term Life Insurance?

• Term Only – You are protected with this insurance product for the time you pay into it, not after. This means that if you paid into a term life insurance policy over 25 years and you died in the 26th year, you would not be entitled to a payout, as your term had concluded.

Mortgage Life Insurance/Decreasing Term Life Insurance

These policies go by two names but refer to the same product, a life insurance policy which gradually decreases over time, in line with a mortgage term. Mortgage protection life insurance is designed to cover the outstanding mortgage balance, in the event the borrower dies over the length of the repayment mortgage term. With these polices the premiums remain the same (in many cases), however, your level of cover would lower over time.

What are the Benefits of Decreasing Term Life Insurance?

• Mortgage Protection -  If you, for example, take a 25-year mortgage with decreasing life insurance running alongside it, and then you die within five years, the payout to the lender would be large and would cover your repayment mortgage term.
• Lower Premiums – These insurance products are cheaper than other insurance types, in terms of monthly premiums. This is because they are designed to protect only your loan repayments.

What are the Pitfalls of Mortgage Life Insurance?

• Mortgage Protection Only – When you take out a policy of this type, the premiums you pay only cover your outstanding debts. If you need protection for your family’s wellbeing, in the event of your death, you may have to look at other life insurance deals.
• Not Suitable for Interest Only Mortgages – If you have an interest only, rather than repayment mortgage, this kind of insurance product would not be suitable. This is because the level of cover decreases over time. Whereas with an interest only mortgage, the funds you need to pay off the mortgage need to be increasing, as you come towards the end of the term. If you were to suddenly pass away, the payout from this product may not meet your mortgage repayment requirements.

Whole of Life Assurance

With a whole of life policy, you are covered for your entire life, so when you die, whatever age that may be, your family (or will beneficiaries) will receive a payout. The funds are made up of the policy premiums paid in for life cover, as well as an investment reserve. The investment portion is designed to grow in the early years of the policy, in order to subsidise what would become a higher premium cost for the ageing policyholder.  Provided the policyholder has paid into it for the entire length of the policy, and the investment grows over time, the policy can be used to pay your inheritance tax bill in advance (if your estate is chargeable for this type of tax). These policies can also be written In Trust, to prevent delays in inheritance funds going to your loved ones after your death.  

What are the Benefits of Whole of Life Insurance?

• Cover for Life – These policies will cover you until your eventual death (provided you keep up with your premium payments).
• Inheritance Tax Bill Sorted – These policies protect your beneficiaries’ inheritance fund after you’re gone, ensuring that they get the maximum payout from your estate. Inheritance tax is payable at 40% on estates valued at over £325,000, at the time of writing.  
• Reviewable – Policies of this sort can be reviewable after a period (say, 10 years). This is where the provider will look at your investments. If they are not performing well and your premiums rise as a result, they may become unaffordable for you. If you do not wish to continue, you can choose to end the policy and cash it in. Alternatively, you can accept the lower payout and continue paying premiums.
• Non-Reviewable Policies Available – If want the surety of a Whole of Life policy, which offers more consistency, you can opt for a non-reviewable policy. These will often be more expensive.
• Fixed Lump Sum – You can also choose to take out a non-profit Whole of Life policy. These pay out a fixed lump sum in exchange for you paying fixed premiums, with no investment element.
• With Profit Policies – It is also possible that a whole of life assurance policy can turn a profit, based on investment performance. These can be managed to work with the stock market, adding bonuses to your basic sum assured. However, profits are not guaranteed.
• Unit Linked Whole of Life Policies – Monthly premium payments, with this type of policy, are used to purchase ‘units’ in a special fund. When the number of units increase, the value of your policy also increases. These, however, work with investments, so if performance is poor, your premiums may increase.

What are the Pitfalls of Whole of Life Assurance?

• Expensive Premiums – Compared with Term Life and Mortgage Protection Insurance, these policies generally cost more per month in premiums. This is because the claim will be inevitable and therefore providers still need to generate a profit from your business, somehow.
• Investment Performance – If the investment proportion of the policy does not perform so well, the policy premiums may become more expensive. As you would need to pay for the same amount of cover.
• Returns Performance – It is a feature of this policy that you may pay in more than what is returned to your beneficiaries upon your death, depending on the type of whole of life insurance product you opt for.

Over 50’s Life Insurance

These are specialist insurance products for the over 50’s market. As they are aimed at older customers, the premiums for this type of insurance can be relatively cheap. However, the payout will also be smaller, in many cases. A policy of this type may be taken out to cover funeral expenses, for example.

What are the Benefits of Over 50’s Life Insurance?

• Smaller Premiums – This type of insurance is aimed at older people and therefore, the premiums may be cheaper than with other types of insurance products. This is due to the fact that the eventual payout, depending on the policy, may be smaller.
• Guaranteed Premiums – With many over 50s plans the premiums are fixed for the life of the policy, so you should always know what you need to pay every month.

What are the Pitfalls of Over 50s Life Insurance?

• Pay in More than Your Get Back – It is possible that you could pay more in premiums for this product than what your family are set to receive upon your death. This could be especially true if you pay in for many years.

Joint Life Insurance

Life insurance policies can be purchased for individuals or couples. With a joint policy, you pay your premiums in exchange for a payout when the first person dies. This can be useful to cover mortgage payments. You can also find policies which offer a payout on the second death, these can be useful for couples planning their inheritance.  In both cases, the policy only pays out only once.

What are the Benefits of Joint Life Insurance Policies?

• Affordability – Joint policies can often be an affordable option for couples, depending on their circumstances.
• Convenience – For those who don’t like a lot of paperwork, taking out a joint life insurance policy can be more convenient.

What are the Pitfalls of a Joint Life Insurance Policy?

• Divorce – In some instances, a couple splitting will mean that the policy has to be concluded. However, with some providers, a joint life insurance can be split into single policies, if there is a break down in the relationship.
• Premiums Increase with Age – If your partner dies in your joint policy and you are left alone, it can be more expensive to take out another life insurance policy an an older person. This means the other person could be left without cover.
• Different Needs – You may require different levels of cover than your partner, for instance, you may earn more. In some instances, taking out two single policies may work out as a more cost-effective way of finding adequate protection for your circumstances.

It is always best to speak to an insurance expert before checking out some life insurance quotes. Get in touch with an advisor if you are interested in level term, decreasing life, single and joint life insurance policies. They can offer you a free, no-obligation quote.