September 23rd, 2022
What’s the best life insurance for me?
If you have been concerned about your family’s wellbeing in the past two years, you are not alone. The Covid-19 pandemic, coupled with the cost of living crisis, has meant both our health and our financial stability have been put at risk.
These events might have spurred you into action when it comes to taking out protection. Cover can not only shield your wealth in a time of crisis, but can also provide invaluable peace of mind.
When it comes to choosing which protection you might need, life insurance usually comes at the top of the list.
Indeed, if you passed away unexpectedly, a payout could be life-changing for your loved ones. They could: continue paying the mortgage on your home; pursue further opportunities such as university or travel; or take time off work during an emotional time.
Plus, the number of protection payouts has increased in the last three years – meaning you can rely on a higher probability of making a successful claim if you need to.
Read on to find out the four key types of life insurance, so you can better determine which is suitable for you.
1. Level term life cover
As one of the most straightforward forms of life insurance, level term cover guarantees the amount your beneficiaries are paid upon your death, if you pass away within a fixed term.
For example, if you took out £150,000 of insurance over a 20-year period, your loved ones will be paid this amount as a lump sum upon your death within the 20-year term. If you die after the 20-year term, the cover will have lapsed, so no payout will be due.
A huge benefit of level term life cover is that your beneficiaries know how much they can expect to receive when you pass away. This might help them more accurately plan for the future, reducing financial stress in the process.
Level term cover is a great choice if you need to provide a certain amount of protection for a fixed time – to cover an interest-only mortgage, or to provide support to your children until they become financially independent.
2. Decreasing term life insurance
Unlike a level term policy, decreasing term life insurance reduces in value over time.
If you took out the same £150,000 of life insurance over a 20-year decreasing term, and passed away in the first year, the full amount would be paid. After that, your payout value drops as the years go by.
Generally, decreasing term life insurance is designed to help loved ones pay off a repayment (capital and interest) mortgage or other debts if you died unexpectedly. So, as the years go by and you pay off more of your mortgage, a smaller payout is required for your family to pay off the rest when you die.
The potential downside of decreasing term cover is that if you pass away in the final years of your policy, your family may not receive a significant amount.
Plus, like level term life cover, this type of insurance has no cash-in value. Once the term finishes, you can’t claim.
On the positive side of things, decreasing term life insurance can be very cost-effective, starting from around £5 a month for the cheapest policies.
3. Family income benefit
When you take out a life insurance policy, it will often be with your children in mind.
If you passed away sooner than you’d hoped, you want to know the next generation can support themselves during this period of grief and beyond.
Family income benefit replaces a one-off lump sum payment with smaller monthly payouts over a fixed period. If you pass away at any point during your policy term, your family will receive the agreed-upon monthly payment for the remainder of that term.
This way, your family could rely on an “income” from your insurance provider that might help cover costs and reduce their stress for a period of months or years.
For example, if you took out £3,000 of cover over 20 years and died 10 years into the term, your family would receive £3,000 a month for the next 10 years. Fortunately, some policies allow you to “index” your family’s payments, meaning the amount paid may rise in line with the cost of living over the years.
If you have more than one child, you can fix a separate policy for each one. That way, you can tailor your cover to your specific requirements – perhaps until each child’s 18th or 21st birthday.
Crucially, your beneficiaries could benefit from receiving a steady income, rather than handling the pressure of a large cash payment. On the other hand, your family may prefer to receive a lump sum, to pay off any immediate debts or funeral costs, for example.
If you do choose family income benefit, it is important to discuss this with your beneficiaries, so they know what to expect if you pass away.
4. Whole of life insurance
Finally, whole of life insurance can be a fantastic option for those who want to cover all bases with minimal hassle.
Unlike the other three options provided in this list, whole of life cover provides a payout whenever you die, rather than for a fixed term.
This form of insurance is the most comprehensive – as it is guaranteed to pay out – so it can also be the most expensive.
Nevertheless, despite a potentially higher cost, you and your loved ones can gain immense peace of mind through taking out whole of life cover, as you know a payout is likely to be offered no matter when you pass away.
When considering whole of life cover, it is crucial to take the cost of your premiums into account. You will continue to pay monthly premiums until you die, so it may be beneficial to discuss the impact of these costs with your financial planner.
Fortunately, a whole of life insurance payout could help your family: cover an Inheritance Tax (IHT) bill; pay for a funeral; or set up a trust for children and grandchildren. If you are able to, taking out whole of life insurance can provide immense security as you get older.
Get in touch
Deciding how to protect those you love after you’re gone can feel overwhelming. If you are exploring life insurance options, contact your financial planner for a holistic conversation about your family’s needs.
We can help you secure the cover that’s right for you, giving you the peace of mind you need in times of uncertainty.
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.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.