If you have a family – a partner, children perhaps, you have little choice about your need for life insurance. They deserve it – it could provide for them if you were no longer there to provide yourself.
But you do have a choice about the form that life insurance takes. Although all types of life cover are designed to pay out to your loved ones if you die, there are some important variations that you need to understand and choices you have to make.
At Continuum we’re looking at the main types, the variations and the add-ons that can help you build the tailored financial safety net you want.
Term Insurance: protection for a fixed period
Term life insurance is the most common and often the most affordable type of cover. It’s designed to pay out only if you die within a set period—the ‘term’ of the policy. This is often arranged to coincide with retirement or paying off a mortgage.
It has some variations.
- Level Term Insurance: The amount of cover remains the same throughout the entire term. It can ensure a fixed amount of money is available to replace income.
- Decreasing Term Insurance: The payout reduces over the term, usually in line with the outstanding balance of a repayment mortgage. Since the cover required falls, the premiums can be cheaper than Level Term insurance.
- Increasing Term Insurance: The lump sum payout increases each year, linked to the Consumer Price Index or a fixed percentage. Your cover keeps pace with inflation, but premiums are usually higher than a standard Level Term policy.
- Family Income Benefit (FIB): FIB is designed to pay a regular, tax-free monthly income to the beneficiaries from the date of death until the end of the policy term, rather than a single lump sum. This can be simpler for families to manage as it mirrors a monthly salary.
Whole of Life Insurance: ‘assurance’
Life assurance or whole-of-life cover is designed to last for the rest of your life. The monthly premiums are relatively high because insurers know that they’ll have to pay out eventually (subject to policy terms and conditions).
This could be the solution for older policyholders. As well as providing for loved ones, it can be set up in trust. This means that the payout will be exempt from inheritance tax, letting your dependents use it to pay off other inheritance tax obligations.
Single or Joint Policies
For couples, there is a choice between taking out two individual policies or one joint policy:
- Joint Life, First Death: This is the most common option for couples. The policy covers two people but pays out only once, on the death of the first partner. Crucially, the policy then ends, leaving the surviving partner without life cover unless they take out a new policy, which could be more expensive due to their age.
- Individual cover: Each partner is covered individually, and a payout is made upon the death of one, while the other policy remains active, offering a second payout on the death of the survivor. This provides more cover but usually increases costs.
Essential Add-Ons
The risk of losing a breadwinner is not the only threat your family need protection against. You can enhance a core life insurance policy with additional protection:
- Critical Illness Cover (CIC): Often bundled with life insurance, CIC is designed to pay a tax-free lump sum if you are diagnosed with one of a pre-defined list of serious illnesses such as cancer, heart attack, or stroke. Like life insurance, it can be arranged at a level to suit your family’s needs.
- Permanent Health Insurance. This is designed to pay a proportion of your salary in the event of illness or accident that stops you working permanently. Payments can continue until your normal retirement age.
- Accident, Sickness and Unemployment cover. This is designed to provide a replacement income in the event of illness, accident or redundancy for up to 12 or 24 months.
Getting an expert to help with your planning
Selecting the appropriate life insurance requires a clear assessment of your family responsibilities, and long-term financial goals.
Getting the cover that is suitable for your needs and getting it at the most competitive price needs expert help.
Call us at Continuum to ensure you get the help you need.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a particular protection product and you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate taxation and trust advice or will writing.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
If premiums stop, then cover will lapse. Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.
