Life insurance: what are the options?
- Shunil Roy-Chaudhuri, Personal Finance and Investment Writer
- 16 October 2023
- 5 mins reading time
If you have a partner or family that depend on you financially and could struggle to make ends meet on your death, then you should consider life insurance. Life cover could give you the peace of mind that your loved ones will be financially secure if the worst happens.
Life insurance provides a lump sum on the death of the policyholder, although some kinds of policies provide regular payments. Policyholders pay for the cover via monthly premiums or, less commonly, a lump sum.
Life insurance policies can vary significantly. The type you might want and how much you should be insured for depends on your requirements and the needs of your beneficiaries. You might, for example, just want a policy that ensures your mortgage is paid off. Alternatively, you might seek to cover the future needs of your partner and children. You may even opt for a separate policy for each of these requirements.
There are two broad types of life insurance: term insurance and whole of life insurance.
Term insurance provides cover for a prearranged time period. The policy ends once the period is over, after which your beneficiaries will no longer be eligible for a payout. You might, for example, take out a policy that covers the term of a 25-year mortgage. This could ensure your loved ones are not left with outstanding mortgage debt if you were to pass away.
There are three types of term insurance: level, decreasing or increasing.
Level term insurance
The level of cover remains fixed throughout the entire term of the policy.
Decreasing term insurance
The level of cover reduces during the policy term. For example, if you just want cover for your repayment mortgage, then the cover could decrease in line with your diminishing mortgage liability.
Increasing term insurance
The level of cover increases during the policy term. This can, for example, ensure the cover rises in line with inflation, safeguarding the buying power of the payout.
The decreasing option is generally the cheapest of these three types of term insurance. The increasing option is usually the costliest.
Whole of life insurance
This kind of cover will make a payout on death, with no limits on the time period. So it provides a guaranteed payout. It is typically used to provide financial support to loved ones and is generally more expensive than term insurance.
Married couples and civil partners could select a policy that provides joint life cover. This won’t pay out on the death of both partners, but just covers either the first or last to pass away, depending on the way it is set up. Couples wanting insurance for both partners would need to take out a separate single-life policy for each person. A word of warning: you won’t be able to split a joint cover policy into two policies if your relationship ends.
Some insurers offer a choice of guaranteed or reviewable premiums on term policies. With a guaranteed premium, the premium remains fixed throughout the term of the policy. But with reviewable premiums, the insurer can increase premiums in line with its financial position and future claims expectations.
Turning now to whole of life cover, premiums on standard (or ‘balanced’) policies stay the same throughout the policy and a fixed sum is paid out on death. But increasing cover options are also available to help protect against the effects of inflation.
One thing to note: you may already have life insurance or death in service benefits with your employer. If this provides adequate life cover then you may not need to take out a new life policy. But it may be worth considering your long-term protection needs and whether you are likely to stay with the same employer for long.
Life insurance is just one form of protection. Critical illness cover can protect you if you suffer from a serious illness that’s covered by a policy. And income protection insurance can provide you with an income if you’re unable to work due to a serious illness or injury.
A financial adviser can take a holistic view of your protection needs and help you decide which insurance policies are right for you and how they can dovetail into an appropriate protection set-up.
At Schroders Personal Wealth one of our principles is to have regular reviews with a financial adviser. This can help ensure you and your loved ones remain well protected despite any changes in your life.
This article is for information purposes only. It is not intended as advice.
Fees and charges apply at SPW.
Any views expressed are our in-house views as at the time of publishing.
This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or part) without our prior written consent.
In preparing this article we have used third party sources which we believe to be true and accurate as at the date of writing but can give no assurance or warranty regarding the accuracy, currency or applicability of any of the contents in relation to specific situations and particular circumstances.
Protection policies have no cash-in value at any time. If you don't pay your premiums on time your cover will stop, your benefits will end, and you'll get nothing back. If the benefit amount has not been paid out by the end of the selected term, the policy will end and you'll get nothing back.
Let's start with a free initial consultation
We'll begin with a free, no obligation conversation to understand if our service is right for you. There are no hidden fees or charges, and you’ll only pay if you choose to go ahead with the recommendations in your personalised financial plan.