Life Insurance Facts

Getting the right type of life insurance for you and your family can be one of the most important decisions you will ever make. The major problem with this decision however is, if you get it wrong you will probably not know until you have died and it is too late. So this article has been written with the hope that it’s a clear breakdown of the cover available to you will help you to make the right choice now and see you right in the future.

There are two main types of life insurance on the market. Although many more types exist, these other types are extremely specific and will probably not apply to you, so we will deal with the main two for now. The two types you are best to concern yourself with are known as Term Insurance and Whole of Life Insurance.

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 main type of life insurance comes in many different forms, but all of these forms are known as Term Insurance. This basically means that the policy runs for a specific length of time, which can be anything from 1 year up to 60 years. Once you have decide the time frame, you then decide the amount of money you want to insure, and then you can work out what you pay in each month. It’s as easy as that. If you die within the timeframe the policy pays out, if not the policy ends and that’s it. Indexation can also be included in this sort of life insurance policy, performing exactly as explained before.

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.

First is decreasing term or mortgage protection. This plan is the same as all term plans in so much as it runs for a specified period of time. However the difference is that the sum insured reduces year in year out. The reason for this is linked to the use it is put to. You would normally use this type of plan to cover a repayment mortgage and with repayment mortgages the amount of debt falls year in year out so the plan just mimics that reduction. The benefit of this is the premiums for 100,000 cover for mortgage protection which decreases each year are a lot cheaper than for 100,000 on level term. So if it is a repayment mortgage you need to cover then this plan is possibly the one for you.

Next on the list of options is Family Income Benefit. This is a relatively new sort of life insurance policy, aimed at providing bereaved families with a payout in the form of an annual income rather than a one off lump sum. The problem with one off payouts for families is that it is then up to them to reinvest the money in other areas in order to create an income for them. This can be traumatic and difficult for grieving loved ones. Family income plans take away this hassle. By insuring for a set income for a set amount of time, if you die before the end of the term, the policy automatically pays out that income to your family until the end of the 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.

The convertible plan takes it to another level. This sort of plan lets you convert the original policy from term insurance plan to whole of life, as long as it is done within the time of the original term. The reason you may want this option is if you couldn’t afford a whole of life policy at the start but find yourself in a position to take one out later. Convertible policies allow you to change to whole of life when you can without having to undergo any health checks.

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.