Traditional life insurance

A quick overview

Life insurance (or sometimes known as life assurance) is a contract between an insurance policyholder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money (the benefit) in exchange for a premium, upon the death of an insured person (often the policyholder). The policyholder typically pays a premium, either regularly or as one lump sum. Other expenses, such as funeral expenses, can also sometimes be included in the benefits, but these vary.

Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; common examples are claims relating to suicide, fraud, war, riot, and civil commotion.

There are many different types of life insurance policy, and they tend to fall into three main categories: decreasing term life cover, level term life cover, anmd increasing term life cover

Term life insurance

Term life insurance covers you for an agreed period of time, for example, 30 years. This is the ‘term’ of the policy. This type of insurance is often taken out to cover a loan, like a mortgage, or to cover an ongoing financial obligation, like raising children, or can even be used to cover the costs of a funeral. So if you have 20 years left to pay on your mortgage, you can take out a term life policy that will cover you for this period of time. There are three different kinds of term life insurance policy, and it’s important to understand the distinction between them.

Decreasing term life cover
Decreasing term means that the amount your insurer pays out will decrease over time. This is used when a debt, loan repayment or mortgage will also reduce over time. In the example of a mortgage, your policy will stay in-line with the amount you owe your mortgage provider for the same length of time as the mortgage. This type of policy usually offers an interest cap, so if your mortgage has an 8% interest rate but your insurer has a 7% interest rate cap, the payout might not completely cover the outstanding debt. It’s therefore important to know as much detail as possible about your mortgage when getting your quote.

Level term life cover
Level term is like the name suggests – your dependents will get the same amount, no matter when they need to claim. However, this doesn’t adjust for inflation, so if you have a long term policy the same amount of cover may seem worth less over time because of the increasing cost of living.

Increasing term life cover
Increasing term means that your insurer will pay out more over time, and it’s usually for people whose families may need more help as the years go by – for instance, if you have young children. This type of cover is designed to adjust to mitigate the effects of inflation and will have reviewable premiums which means you allow the insurer the option to increase not only the payout, but also the premium. The increase can either be index-linked (in-line with inflation) or a fixed rate, the benefit of the latter is that if kept long enough it may rise faster than the rate of inflation.

Whole of life insurance

This type of insurance covers you for the whole of your life, rather than a fixed period of time. You pay into a policy, and the insurer agrees to pay your loved ones in the event of your death, no matter when that might be. It’s a good kind of policy to have if you want worry-free cover, without the hassle of taking out a new policy each time a policy term expires.

Whole of life insurance (sometimes called ‘life assurance’) is usually significantly more expensive than term life cover for the same size of payout, and normally has functions besides insurance. For instance, you may be able to borrow against the value of your whole of life insurance, which is one reason for the inflated cost.

Certain whole of life policies are designed to be cheaper than term life as they cover shorter periods for smaller payouts and don’t come with extra options such as borrowing against the value of the policy.

Joint life insurance

If you have a partner and want to make sure that your other half, and children, will be looked after if one of you should die, then a joint life insurance policy could be right for you. It insures two people at the same time and pays out if one of you passes away. It can make life easier knowing that you are both covered, but remember that in most joint life policies, once you make a claim, the partner who is left won’t be covered anymore – they’ll need to take out their own individual policy after that.

It’s worth remembering that if you are in a relationship and wish to get cover, you can take out two single policies, which have the added advantage of paying out individually, rather than just once as with joint life insurance.

Over 50s life insurance

Over 50s life insurance policies are designed to meet the needs of people aged between 50 and 80. People at this age have different needs and lifestyles, and may want the flexibility of adjusting a policy so that it’s more affordable, but still guarantees something to help their families if they die.

Critical illness cover

Critical illness cover pays out if you fall seriously ill, usually with a single lump-sum payment. It’s important to make sure that you know what critical illnesses are covered by your policy, and what length of time your policy covers. It’s a useful way to help towards your expenses if you’re too ill to work, or would struggle to meet bills like medical expenses.

The payout for critical illness will usually be a portion of your overall payout, for instance 25%. This will differ by insurer, and normally any critical illness benefit cannot be added to an existing policy but must be bought at the point the policy is taken out.

Terminal illness cover

Terminal illness cover will pay your family a lump sum if you’ve been diagnosed with an illness from which you will die in the next twelve months. This may be a devastating time for you and your family, and having terminal illness cover can help you all by easing your financial worries during this time.

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