There are three main types of life insurance available:
Level term life insurance
Put simply, Level term life insurance ensures that you are covered for the same amount for the length of your policy. It will pay out a lump sum of money to your loved ones if you die during the term of your policy. If you do not pass away during the term, the policy will expire and you won’t get any money back.
Level term life insurance gives you the freedom to set the length of the policy, the cover amount and the specific beneficiaries who would receive the pay out in the event of your death.
This type of policy can be used to help pay off an interest-only mortgage. With this type of mortgage, the remaining amount payable remains the same for the length of the term.
The policy term can be determined by you, with most insurers usually agreeing to offer cover up to your 80th birthday. The longer the term of the policy and the higher the sum assured, the more expensive it will be. This is because as you get older, the probability of a pay out becomes more likely and the insurers account for this.
The monthly premium will also be dependent upon your age, health status and whether or not you are a smoker.
It’s wise to consider the long-term affordability of a policy, as your income and financial circumstances can vary over the term.
Decreasing life insurance
Decreasing life insurance is often used to pay off a repayment mortgage in the event of the policy holder’s death.
As you pay off what you owe on your mortgage, the amount you are covered for reduces over the period of the term. For example, if your outstanding mortgage at the start of your policy was £140,000 and your family claimed on your policy in the event of your death in year one, this is the amount they would stand to receive. If the remaining amount by year 24 of the policy was £2,000 and you passed away, this is the amount your family could receive in a claim.
As decreasing life insurance is designed to specifically protect repayment mortgages, it is generally a cheaper option. Your monthly premium will remain the same throughout the term of the policy as the sum assured decreases.
As you calculate how much is remaining on your mortgage, you are able to choose the policy term (the number of years your policy will last for). Therefore, your cover will usually finish when the mortgage has been paid in full.
This type of cover is not designed to provide any additional money for your family once the repayment mortgage has been paid off.
Whole of life insurance
Whole of life insurance will pay out when the policy holder dies, regardless of when this happens.
Because this life insurance is guaranteed to pay out, it’s often a more expensive option than other types. This is because insurance companies know they will have to pay out when the policy holder dies.
Whole of life policies are often referred to as ‘Over 50s’ policies and are a viable option for people over 50 years of age.