What types of life insurance are there and what are they for
One of the most important decisions you can ever possibly make for the good of you and your loved ones is getting good life insurance. Of course you can never be 100% sure that you have the best sort of insurance until you actually die and it comes into action. It is for this reason that I write this article. It will aim to outline the different types of life insurance available and will hopefully help you find the right sort of cover for your needs.
Essentially there are really two types of life insurance available on the market there are more but owing to their particular niche uses they are probably not relevant to be discussed here. The main types that you will come across, and probably need in one way or another, are Term Insurance and Whole of Life Assurance.
Whole of life insurance is fairly self explanatory and the easiest to explain, as it essentially insures you for the whole of your life. You specify an amount for which you want to insure your life, and you then agree to pay into an insurance policy a certain amount every month until your final day comes in whatever shape or form. You can feature in to this policy “indexation”, which means that your policy performs in line with inflation. This can be extremely useful as the value of money has a big tendency to change over time. At the end of the day, you don’t want to be paying good money into an insurance policy for a specified amount only to discover that when the time comes, that specified amount can barely get your family through to the end of the next week.
The main reason that you would decide to choose whole of life insurance is for the protection of your family. You want to make sure that in the event of your death there is a sufficient amount of money saved for your family to be able to reinvest and provide an ongoing source of income for the future when you are no longer there to provide for them. The downside of this form of insurance is that because it runs for the whole of your life, it is not the cheapest option available. It is, however, the only one that guarantees a cash payout at the end of your life.
The other type of life insurance comes in many guises but is simply known as Term insurance for the basic reason that it runs for a specified term, anything from one year to 50 or 60 years. You set the sum insured you require and you decide what term you like and that is it, it will run for that period at that level. If you die during that period it will pay out the benefit, if you don’t it will just cease and that is it. Term insurance can also include indexation, as explained earlier, it doers the same thing just increases the premium and sum insured at the rate of inflation.
As I have said, term insurance comes in several forms. We have level term insurance, decreasing term or mortgage protection as it is sometimes known, family income benefit also called family income plans, convertible term and last but not least renewable term insurance. I will try to shed some light on these in the following paragraphs.
The first is decreasing term or mortgage protection insurance. Like any term insurance plan, this plan runs for a set length of time. The difference here though is that the amount insures reduces as each year passes. This is because of what money you are actually insuring. This type of insurance is usually in conjunction with a repayment mortgage. With this sort of mortgage you gradually pay off the whole amount of the loan, so the remainder to pay off reduces each year. Therefore you only need to insure against the amount you have left to pay. The benefit is that the premiums for 100,000 which decreases year on year are much cheaper than for 100,000 on level term. So if you have a repayment only mortgage, this could be the policy for you.
Family Income Benefit, this plan in the big scheme of things is quite young; it was born out of the need for families to produce an amount of income each year rather than just a lump sum. The problem with a lump sum for family protection is it is incumbent on the beneficiaries to invest the money to produce the income they have lost as a result of the life assureds death. Family income plans do this with the minimum of hassle. All you do is take out the plan for a set period of time and for a set amount of income per annum and if the life assured dies then the plan just pays out that income each year until it has run its full term.
Convertible term insurance and renewable term insurance are very similar in so much as they allow the plan to be changed in some way in the future as long as that change takes place before the end of the term. Renewable term insurance allows the policy holder to renew the plan for a further term without any underwriting (that means no health checks) this means you could have a 10 year renewable term plan and essentially renew it for a further 10 years regardless of your health as long as you do it before the first ten year term has finished.
Convertible term takes the same concept a little further. It essentially allows you to convert the plan within the term to a whole of life insurance plan. The main reason someone would do this is simple, you may want whole of life insurance but the premiums may be too expensive for your budget at the moment, convertible term allows you the option to change to whole of life insurance later without any checks of your health so quite a benefit indeed.
You should know, however, that convertible and renewable policies are more expensive than regular term policies. Also, when you do come to renew or convert your policy you will be asked to pay the premiums in accordance with a person of your age at that time, which will inevitably be higher than you have been previously paying, so don’t be under the impression that you are getting a free lunch. The main thing is to ensure that you have the right cover needed regardless of your health.
So now you are hopefully a little bit more enlightened as to the different life insurances out there available to you. Nevertheless, it is strongly advised that you should consult an expert before making any decision, for as we know, the wrong decision can go undetected until it is too late to fix.
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