None of us know what is around the corner – so at Continuum, we don’t just look at ways to build your wealth for the future. We look at ways to help protect your family, whatever that future holds.
The most important way is probably life insurance.
For most of us, life insurance is the simple way to give ourselves peace of mind and give our family the financial security they need. But there are many types of life cover available, and the right one for you will depend on your individual circumstances, how much you can afford to pay in – and how much you need your policy to pay out.
It will also depend on exactly how you want your policy to work. We look at the seven basic types and what they can do for you.
Level term insurance
This is the simplest type of cover. You specify how long you want the policy to run – perhaps up until your retirement, and it will pay out a fixed lump sum if you die during that term. You will know exactly how much money your dependents will be left with, and how much you will pay out each month to provide it.
Term insurance can be a bargain, especially if you arrange it when you are young.
Increasing term insurance
Level Term insurance is simple to understand, but we have all seen the effects of inflation over the years, and a death benefit that seemed generous when you took the cover out may be less than adequate after a few years. Increasing term insurance – also known as index-linked term life insurance – factors in the rising cost of living. The sum insured will either increase by a fixed amount each year, or in line with the inflation figures. This means the original death benefit should keep up with inflation, but you will need to review the level of cover you require frequently so that the benefit will be enough to meet your needs, however as your insured sum rises, so will your premiums.
Decreasing term insurance
Decreasing term insurance takes the opposite approach. It is designed to cover debts that reduce over time, such as a mortgage. So, when you buy a home you might take out a life insurance policy to cover £150,000 worth of mortgage, but as the mortgage debt is reduced over the term so the sum assured decreases until the mortgage is paid off (assuming all repayments have been made on time) within the original policy term. Your dependants would have less to repay to the mortgage lender as the outstanding mortgage reduces.
Being ‘over-insured’ means paying more than is necessary in premiums. With a decreasing term policy, the level of cover reduces and the premiums for the same amount of initial cover are generally lower than a level term assurance policy.
Family income benefit
Family income benefit policies are a special type of decreasing term policy that instead of a lump sum, pays out a regular income until the policy’s expiration date. So, if you take home £2,500 a month, you can arrange for that amount to be paid to your family if you die. If you died one year into a 20-year policy, your family would receive payments for 19 years. If you died just a year before the policy ends, your family would receive payments for only the one remaining year.
Renewable term insurance
Term insurance offers cover for a fixed period. Renewable term insurance gives you the option of extending at the end of the term. Your premiums may increase in line with your age, but there are no further medical tests, and any health problems you’ve suffered since the initial policy was taken out will not be taken into account or reflected in the new cost of the policy.
It is an option which could make it easy to extend your cover.
Joint life insurance
A joint life policy – giving married or cohabiting partners cover could cost less than two single policies. However, these policies are usually on a ‘first death’ basis, so it will pay out when one person dies, at which point the policy ends.
This type of policy guarantees your dependants a payment regardless of when you die – there is no time limit as with term insurance. It will be more expensive than term cover – but it can be particularly useful for dealing with Inheritance Tax. By arranging for the proceeds to be paid in trust, it can be used to pay death duties, leaving the rest of an estate untouched.
What does your family need?
Everyone has different protection needs. At Continuum, we can work with you to see what your family responsibilities require and find you the most appropriate ways to provide them.
Simply call us for the protection answers 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 suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
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