What are the main types of life insurance?
As a parent, nothing is more important than ensuring our loved ones are financially secure when we die. Taking out life insurance cover can see that your family is provided for during the hard times ahead. But before you take out a policy, you need to understand how the main types of cheap life insurance work.
Why do I need life insurance?
None of us knows exactly when we’ll die, yet without proper planning, you could put your family at risk financially. With a life insurance policy, a cash lump sum is paid out to your family in the event of your death, supporting them through this difficult time.
Upon many things, life insurance can provide your family with financial support towards:
- Daily living costs
- Household bills such as rent or mortgage payments
- Loans and debts
- Childcare support
- Funeral costs
When you take out a policy, you begin paying for monthly premiums. The cost and length of cover are agreed upon by your insurer.
How your policy works depends on the type of life insurance you choose. The two main types of life insurance cover are whole life insurance and term life insurance. These types of life insurance share differences in both cost and length.
Whole life insurance
Also known as ‘life assurance’, whole life insurance covers you for the remainder of your life – so long as you keep paying for your premiums. No matter when you eventually die, your insurer pays a lump sum to your loved ones.
Typically, whole life insurance is one of the more expensive types of life insurance cover, though it guarantees your loved ones a pay-out.
Whole life insurance mainly works in 2 forms of cover:
- Balanced cover
- Maximum cover (or with-profits whole life insurance)
With balanced cover, the cost of your premiums and pay-out amount is fixed throughout the policy. One of the benefits is that even as you get older and more susceptible to health conditions, your premiums remain the same.
Maximum cover is where your insurer pays the money you pay for premiums, into an investment fund. The goal is to make a return big enough to cover the eventual pay-out of the policy. If the investment performs, you may even receive a bonus, however, if it struggles to perform, your premiums could be increased to cover the loss.
Term life insurance
Unlike whole life insurance – which stays in place till death, term life insurance covers you for a fixed period of time (i.e 20 years or more). Because of this term life insurance is typically cheaper than other types of cover.
There are 3 types of term life insurance cover:
- Level term cover
- Decreasing term cover
- Increasing term cover
As you might expect, with level term cover the pay-out amount remains the same throughout the policy. This means that your family receives the same amount of money, whether you die in the first, or last year of cover. The main downside is that the payout amount is not protected from inflation, so the policy may lose value over time.
Increasing term cover is designed for if your family may need financial help later down the line. The pay-out amount increases over time, however so do your premiums. Unlike level terms, increasing term cover is protected from inflation, so the value keeps up with the rise in the cost of living.
Decreasing term cover (also known as mortgage life insurance) is designed to cover large payments such as a mortgage, which your family may struggle to pay off alone. As you pay towards reducing the outstanding balance, the pay-out amount of your policy reduces. If you die before the mortgage has been cleared, your family can then use the pay-out to pay off the remaining balance.
Joint life insurance
If you and your partner share the financial responsibility of the household you may want to consider taking out a joint policy. Joint life insurance providers cover two people under a single policy, as opposed to taking out individual cover. It is a popular choice among couples as it can work out cheaper and is easier to use.
Joint life insurance works in two ways – first death & second death.
With first death, the policy pays out after the first death in the couple. The policy then ends and so the surviving member will need to seek further cover if required.
Second death is often the more expensive choice. The policy pays out once both of the policyholders have died. The money then goes to their children or selected beneficiary.
Can I get life insurance with a pre-existing condition?
Though it’s possible, the cost of cover rises significantly – depending on the condition. This is because the insurer is taking a greater risk in insuring you as opposed to someone who is considered healthy.
Guaranteed life insurance would most likely be your best option – this is designed to provide cover for people who may struggle to get accepted for the other types of life insurance due to health reasons.
However, not all conditions are viewed as serious, which means they may have less effect on getting cover. For example, asthma wouldn’t be viewed in the same ways as a heart condition or cancer. Different providers will have different criteria, so be sure to do your research before you start shopping for life insurance.
There is also over 50s life insurance – this is a type of whole life policy for people aged over 50 that would need to pay more for life insurance due to age.
How insurers calculate the cost of life insurance
When applying for life insurance your insurance provider will normally ask you some general questions regarding your health and lifestyle. Ultimately the cost of life insurance is determined by how likely you are to make a claim.
Your insurance provider may ask questions regarding:
- Family medical history
- Smoking status
- Type of cover needed
- Length of cover needed
It is important that you answer these questions truthfully, otherwise, your policy could be voided later down the line.
How can I reduce the cost of life insurance?
While the cost of life insurance can differ, depending on the provider, there are a few ways to get cheap life insurancecover:
- Buy life insurance while you are young – For most types of life insurance, it’s often cheaper to take out cover when you are young. This is because as you get older the risk of death increases and so costs rise too.
- Quit smoking – Regardless of your age, if you are a smoker you generally pay more for life insurance, that’s why it’s more beneficial to quit. Some providers may reduce your premiums as an incentive for you to give up.
- Reduce your alcohol intake – As much as many of us love a drink, it’s well known that alcohol can harm your health. While you don’t need to go cold turkey, be sure to drink in moderation to avoid any unwanted health problems in later life.
- Get term life insurance – If you’re looking to cut costs a term life insurance policy is often cheaper than other types of life insurance. Though whole life insurance is considered a long term option it can be expensive.
Where can I buy life insurance?
Thanks to the internet, life insurance can be bought online from a vast range of providers and comparison sites. For the best prices, make sure you shop around when searching for a quotation.
Whichever type of life insurance you decide to take out, make sure you understand the terms and conditions of your policy agreement. As with most documents, many of us overlook the small print, which can potentially have a significant impact on your cover.