Life insurance – choosing a policy
Getting the right life insurance policy means working out how much money you need to protect your dependents. This sum must take into account their living costs, as well as any outstanding debts, such as a mortgage. This guide will help you understand the different types of policy available, how they work and the difference between joint and single cover.
Level term insurance ?
Your policy lasts for a pre-agreed number of years and pays out a set amount if you die during that term.
This type of policy can either cover a fixed debt, such as an interest-only mortgage, or provide a lump sum for your dependants in the event of your death.
Pros: Simple and affordable for most.
Best for: People with dependents and those with an interest only mortgage.
Decreasing term insurance (also known as mortgage protection)
Your policy lasts for a pre-agreed number of years, which usually matches the length of your mortgage, and pays out if you die during that time.
Each year the potential pay-out decreases as it is designed to be used with a repayment mortgage where the outstanding loan decreases over time.
This means that this type of policy is cheaper than a level term insurance.
Pro: Affordable for most.
Con: Typically only covers mortgage balance.
Best for: Those with a repayment mortgage whose dependents can cover other expenses.
Family income benefit insurance
This type of policy is similar to level and decreasing life insurance (see above), except that it pays out a regular income for the remaining term rather than a lump sum.
If you match your current or future take-home salary, for example you can make sure your family won’t need to change their standard of living.
Pro: Very affordable for most.
Con: Won’t pay out for long if the policyholder dies late in the term of the policy.
Best for: Best for people whose dependents might suffer financially if the main earner dies.
Your policy covers you for the rest of your life so your dependants get a pay-out no matter when you die.
This type of policy is typically more expensive than those that cover a set period of time.
Pro: Pays out to your dependants as long as you keep up with monthly payments.
Con: More expensive than shorter term policies.
Best for: It is generally used to provide money to cover a funeral or for inheritance tax planning.
Find out more about whole-of-life policies in Life insurance and Inheritance Tax.
Pension term insurance
This type of policy is no longer available for new customers, however if you bought one before it ended in 2006 you might want to keep it for its tax benefits, as the premiums are eligible for tax relief.
Should you get a joint life policy?
Who needs to be covered?
‘Single life’ policies cover just one person. A ‘joint life’ policy covers two people and when one person on the policy dies, the money is paid out and the policy ends.
You must decide whether joint policy pays out on first or second death as this will determine when the policy ends.
When choosing between these options think about:
Affordability – a joint life policy is usually more affordable than two separate single policies.
Work benefits – if one of you has work ‘death in service’ benefit, you might only need one plan.
Health – if your joint policy is with someone in poor health, this might increase your monthly payments
Cover needs – do you both have the same life insurance needs, or would separate policies with different levels of cover be more appropriate?