Having in place adequate life insurance is essential for securing the financial future of your loved ones if the worst were to happen to you.
A life insurance policy lasts for a set period of time (term), you pay your monthly premiums and if you pass away during this time span, your loved ones will receive a lump sum pay out.
This lump sum pay out is commonly used to:
- Clear your mortgage
- Help with family living costs
- Cover the cost of your funeral
- Provide an inheritance.
Depending on what you are looking to protect, the type of life insurance policy you choose may differ.
Typically, there are two main types of life insurance; level term and decreasing term.
The pay out sum
The key difference between level term life insurance and decreasing term life insurance is the lump sum pay out.
Level term life insurance offers a fixed lump sum, meaning that whether you pass away 1 year or 10 years into the policy, the amount your loved ones receive remains the same.
Decreasing term life insurance, on the other hand, offers a lump sum pay out that reduces in value over the course of the term.
Therefore, if you pass away 1 year into the policy, the amount paid out will be significantly higher than what it would be if you passed away after 10 years.
The cover protection you need
The pay out type you require is likely to be heavily influenced by what it is you are looking to cover.
For example, decreasing term life insurance is best suited to cover the outstanding balance of a repayment mortgage.
The pay out sum can be set to reduce in line with the remaining mortgage balance, so that if you were to pass away at any point during the policy term, your loved ones would receive a pay out large enough to clear the mortgage.
Level term life insurance on the other hand is best suited to covering fixed costs, for example, funeral costs, an interest-only mortgage or an inheritance.
Level term life insurance could also be used to protect a repayment mortgage, meaning that the further into the term you pass away, your loved ones will receive a sufficient amount to clear the mortgage balance but also have some left over to spend as they deem fit.
As a result, when determining the best cover type for you, you should consider what it is you are looking to cover and which pay out type would be most appropriate.
The cost of premiums
The difference in pay out type also has an effect on the cost of each life insurance policy type.
As a general rule of thumb, the cost of your monthly premium is calculated based on the level of risk you pose to the insurer.
This takes into account information about:
- Your age
- Your health
- Your smoking status
- Sum assured
- Term length.
However, because the level of risk associated with decreasing term cover reduces over time, this policy type tends to be cheaper than the level term sum assured equivalent.
Therefore, it is also necessary to consider the constraints of your budget and which type of insurance will offer the required amount of cover, at a cost you can afford.
Choosing between level term and decreasing term
Whilst life insurance can often seem like a complicated matter, choosing the right cover doesn’t need to be a difficult endeavour.
You simply need to determine what it is you are looking to cover, and which pay out type would be best suited to provide this level of protection.
Decreasing term is best for covering costs that diminish over time, such as a repayment mortgage or other outstanding debt.
It is also the most cost-effective form of life cover.
Whilst level term life insurance is best for covering costs where a fixed amount will be required.
Joint life insurance or 2 single policies?
If you are in a relationship you may consider taking out joint life insurance cover.
This option is available with either level or decreasing term policies.
The main benefit of joint cover is that you only pay one monthly premium and it is approximately 30% cheaper, compared with paying for two single policies.
Whilst both parties are covered simultaneously, a joint policy will only ever pay out once, (usually on the first death).
This then leaves the remaining partner either unprotected or taking out a new policy when older, (thus paying higher premiums).
Whilst two single policies means paying two premiums, it also means potentially two separate pay outs.
If you have children that depend on you, having double the coverage from separate policies is usually the preferred option.
You can always ask for help finding the best quotes
If you are still unsure of the best option to meet your needs, a FCA registered life insurance broker can help you determine the right policy.
A broker can also compare quotes on your behalf, ensuring you secure the cheapest possible premium.
Alternatively you could use a comparison website, however you may not receive quotes from the widest array of insurers.
