6 types of life insurance to choose from

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No matter what your specific circumstances and budget are, there are several different types of life insurance you can choose from. This makes it easy to find the one that’s right for you.

Life insurance allows you to provide financial security to your loved ones, even when you’re not around. This is a particularly important consideration at specific life points, such as when you add a new member to your family or buy a home. Luckily, life insurance policies come in all shapes and sizes, so it’s possible to find one that suits your needs perfectly.

So what are the different types of life insurance? Let’s dive in. 

What are the different types of life cover?

All life insurance coverage works on the same basic principle: you pay in money while you’re still around so that your beneficiaries receive money when you pass away. Depending on your coverage type, your beneficiaries will either receive a lump sum payment or regular ongoing payments. 

Your premiums — the payments you make into your policy — are typically worked out on a monthly or annual basis.

Life insurance tends to be more expensive if you are:

  • Older
  • Have preexisting health conditions
  • Looking for longer-lasting cover
  • A smoker

To understand the different types of policies on offer, the first distinction to make is how long your coverage is valid. Let’s take a look at the different options based on that key factor.

What are the 2 main types of life insurance?

There are two main types of life insurance policies: term life insurance and permanent life insurance. The main difference between the two of them is the length of the coverage. 

Term life insurance

Term life insurance is, as the name suggests, life insurance that is only valid for a particular term. If you pass away during this time, your beneficiaries will be paid out.

You and your insurance provider will agree upon the period when you take out your policy. After that, you can either choose to renew or abandon your coverage. 

This type of insurance policy can be a good choice if you have a mortgage to cover and/or have children. 

Term life insurance can provide:

  • Decreasing cover, where the amount paid out decreases over time — ideal for covering a specific debt or mortgage
  • Increasing life cover, where the amount paid increases over time — a good idea for families with young children whose financial needs may change over time
  • Level term life cover, where the amount paid out stays the same over time (even though inflation means the cost of living continues to rise)

Whole of life insurance

A whole of life insurance policy is a type of permanent life insurance, meaning it will pay out regardless of when you die. This is reassuring as it means that you can be guaranteed that your loved ones are always covered even if your policy reaches the end of its term.

You may also have heard this referred to as life assurance — quite simply because you have the assurance that you’ll be covered for the rest of your life. We take you through the details here.

Be aware, though, that because whole of life cover ensures that you’re never without protection, this type of life insurance is usually more expensive than others. 

But there are other financial considerations that could make this option more appealing. For example, having the right kind of life cover in place may mean that your family won’t have to overpay on inheritance tax (life insurance is subject to different laws in the UK). This issue is complicated, however. So, the best thing to do is chat with a professional about your specific needs and financial situation. 

What are the 6 types of life insurance?

Life insurance is further divided into 6 different policy types. We’ll take you through each one and why it might be a good fit for you.

Life insurance policy types

1. Universal life insurance

Like whole of life cover, universal life insurance is a type of permanent life insurance. This means your loved ones are covered regardless of when you die.

The main features that differentiate universal cover from whole of life cover are that it is: 

  • More flexible
  • More affordable 
  • Not necessarily as protective

For whole of life cover, you will pay a set premium every month with a guaranteed payout at the end of life. With universal coverage, you can choose to increase or decrease the amount you pay every year, and your death benefit will fluctuate with those choices. 

2. Mortgage life insurance

Mortgage life insurance is designed to help your beneficiaries pay off your mortgage if you pass away. You may also choose to have critical illness insurance that will cover your mortgage if you are diagnosed with an illness that is considered critical in terms of your policy. 

Mortgage insurance is often decreasing cover, meaning the amount you pay in will reduce the closer you get to paying your mortgage off. Basically, the more of your mortgage that is paid off, the less your beneficiaries will need to cover the mortgage debt if something should happen to you.

Taking out life insurance when you get a mortgage isn’t mandatory, but it’s a good idea to protect the financial well-being of any dependents you have.

3. Credit life insurance

Credit life insurance is for paying off any outstanding monthly commitments on specific loans you might have. If you are permanently disabled, fall seriously ill, or pass away, this type of life insurance assures your family won’t be saddled with debts they can’t meet.

If you have loans that have helped you buy a new car or you have credit card debt to clear, this can be a good option.

Because this type of insurance addresses specific debts, the premiums are generally lower than more comprehensive types of life insurance. 

4. Funeral insurance

Funeral cover may be included as part of another life insurance policy or you may choose to purchase a stand-alone policy. This kind of insurance will help your loved ones take care of the costs of your memorial service — another way to give you peace of mind that they will be looked after when you’re no longer around.

5. Joint life insurance

A joint life insurance policy covers two people. There are two types of joint life insurance — one that pays out beneficiaries after both people have passed away (survivorship coverage) and one that pays out after the first of the two dies. 

This type of insurance can be valuable in both domestic and business partnerships. For couples, it can be a great way to create a trust for their children or to leave a donation to a charity. For business partners, it can assist with passing on a business once both partners have passed away.

6. Supplemental life insurance

As the name suggests, supplemental life insurance supplements other coverage you may have through an employer, offering your loved ones even greater protection. 

If your employer offers you life insurance as a benefit, you may be able to choose to opt into a supplemental policy on top of this. For this reason, supplemental life insurance is also known as voluntary life insurance. It means your death benefit will be greater than if you stuck with the basic policy alone.

It’s important to do your homework here, as it may be more affordable to buy additional life insurance privately than to go through your employer.

What type of life insurance is best?

The reality is there’s no one-size-fits-all when it comes to life insurance. 

You may, for instance, want to ensure that your policy includes critical or terminal illness coverage, which will mean that your beneficiaries will be paid out if you fall seriously ill.

The good news is, you don’t need to choose just one. Unlike other types of insurance policies, you can have more than one life insurance policy at the same time. 

If you’d like some help making your choice, get in touch. You don’t have to figure this out on your own.

In summary

Life insurance can be loosely divided into:

  • Term insurance, which is valid for a set period of time
  • Whole of life insurance, which pays out regardless of when you die

Depending on your specific financial needs and the protection you require, you can opt for different kinds of coverage. These include:

  1. Universal life cover, a more affordable alternative to whole of life insurance
  2. Mortgage life insurance, which helps to pay off a mortgage if you pass away
  3. Credit life insurance, which covers specific debts
  4. Funeral insurance, which covers funeral costs
  5. Joint life insurance, which covers two people
  6. Supplemental life insurance, which can be added on to the benefits your employer may provide

Good luck finding the perfect policy!

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