Understanding Life Insurance Policies

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Life insurance policies are a fantastic way of giving you a little bit more peace of mind over what will happen to your family should anything happen to you. Unlike a will, a life insurance policy will make a pay out to your family which recognises what you could have earned for them over the coming years if you were still alive and healthy. When it comes to actually taking out the policy, life becomes a little more difficult.

There are so many different types of life insurance policy to choose from and then there are dozens of different providers on top of that! It is important to look at them all carefully, though, because each and every one will have a different duration or different benefits which will be worth considering. Finding the right one for you will be an important task and will depend entirely on your particular preferences; how long you’d like to be covered for, how much you would like to be paid to your family if they did claim and how much you are willing to pay each month or year as a premium.

Term insurance vs. Whole-of-life insurance

As a starting point, there are two main types of life insurance policy: term insurance and whole-of-life insurance.

Term insurance is the most common type of life insurance policy. It will insure your life for a specified period of time and if you sadly pass away within this time frame then your family will receive compensation. If you are still alive and kicking at the end of the policy period then the policy will simply expire but you will receive nothing back.

Whole-of-life insurance will cover you from the point at which you take it out until you die, whenever that may be. The premiums are much higher because it is inevitable that a payment will be made at some point. Many of the policies are actually called ‘whole-of-life assurance’ policies because they recognise that whatever happens, money will be paid to someone.

Term Insurance

Unfortunately, the decisions don’t end there. If you do decide that you want to take out a term insurance policy, there are several types which you will need to choose between.

Level term insurance

This type of policy will pay out a fixed amount of money to family members if you die within a certain specified time frame. The amount of money to be paid out is agreed on at the start of the cover and won’t change over time, even if your circumstances do. This means that you know exactly how much your family will be left with in the event that you die unexpectedly.

Increasing term insurance

This type of policy will take into consideration the rising cost of living and will account for that in the event of a claim. It is designed to overcome the fact that the actual value of money, in terms of what it can buy you, decreases each year with inflation. In order to do this, the claim amount will be fixed at the start of the policy term but it will be seen in real money terms. This means that the effects of inflation on this sum of money will be considered and your family or dependents would receive the full amount, including inflation, should you pass away within the given time frame. Some policies can be agreed to rise by the same amount each year, others will rise at the rate of the RPI (Retail Prices Index).

There is one catch, as the sum increases each year, your premiums will also increase. If you do decide to buy one of these policies, you must be willing and able to pay a higher premium each year.

Renewable term insurance

Most life insurance policies will allow you to renew them once they expire, but only if you agree to have another health check. A renewable term insurance policy will bypass the need for a review of your health and will allow you to take out the policy again with the same conditions.

Joint life insurance

If you are co-dependent financially with a partner or family member, for instance, you may wish to take out a joint life policy as it could work out cheaper than buying two separate policies. You should be aware that most of these policies are written on a ‘first death’ basis. This means that any other dependents will not be covered if both policy-holders were to die at the same time, or if they died after the first policy-holder. If the second policy-holder then wanted to take out their own insurance policy, they might find that it is much more expensive as they would be older by this time.

Family income benefit

This policy will pay out in the form of monthly instalments of an agreed sum but only from the date of the claim until the agreed end of the period covered. This would result in much less money being paid out by the insurer and therefore means that premiums are much lower. But, this money would only help to lessen the financial burden temporarily; it wouldn’t help to clear a mortgage or other existing debts.

Whole-of-life insurance policies

There are also several different types of policy to consider should you decide to take out a whole-of-life insurance plan.

Non-profit whole-of-life policies

These policies work in a similar way to term insurance policies. The named dependents will receive a lump sum or a monthly income in the event of the death of the policy-holder, which is to be set at an agreed rate at the beginning of the period of cover.

With-profit whole-of-life policies

These policies will invest the money that you pay on your life insurance policies so that when you die, your family or other dependents will receive the agreed amount plus any profits from investment which are linked to your policy.

There are many more types of life insurance policy available, but the ones listed above are the main types most commonly listed on company websites and comparison sites. It is really important to take the time to sit down and work out the best option for you and your family, as the outcome of each policy in the event of a claim is very different and could have huge consequences. The policies are designed to give you peace of mind, but this will only happen if you make the right choice.

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a qualified financial adviser before making any decisions.

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