Thinking about your own death is not something many people want to dwell on. But wouldn’t making sure your family could cope financially without you help give you peace of mind?
Life insurance may sound scary. But it’s designed to protect what is most important to you. Having a policy simply means your family will receive a lump sum if you die – or in some cases a guaranteed monthly income. So, if the worst did happen, your loved ones would at least be able to pay the mortgage, bills and any education costs.
But perhaps you’ve looked into this before, only to be put off by industry jargon? What’s the difference between term insurance and whole-life assurance? What is meant by ‘guaranteed premiums’ and ‘waiver of premium’? If you usually give up when confronted with such language, read on.
Term insurance and whole-life assurance explained
Term insurance lasts for a fixed term – often between 10 and 25 years – and only pays out if you die during that period. If you’re still going strong at the end of the term, it ceases to have any value and cannot be cashed in (although the satisfaction of outliving the policy will probably be compensation enough).
There are three main types of term insurance:
- Level term insurance – offers a set sum of cover for your death at any point during the term
- Decreasing term insurance – the cover gradually falls, so the pay-out will be less if you die near the term’s end. Mortgage providers tend to try to sell you this when you apply but get a range of quotes before committing.
- Increasing term insurance – the cover gradually rises over the term to account for inflation.
Expect decreasing term insurance to be cheapest and increasing term insurance to be most expensive.
So how does whole-life assurance differ? It guarantees a pay-out when the inevitable comes to pass. That’s assuming, of course, you’ve always paid the regular charge or ‘premium’ for your cover. Not surprisingly, these whole-life policies are more expensive.
Premiums and pay-outs: the nitty-gritty
Premiums can be paid monthly by direct debit or annually. Paying for the year ahead may earn you a discount as it reduces an insurer’s administration costs.
All forms of insurance relate to risk. That means your premium will depend on a variety of factors including your age, whether you smoke, family medical history and any health conditions.
If you choose guaranteed premiums, the amount you pay each month will always stay the same. Charges are likely to be higher at first but you need to weigh this against the long-term certainty that your premium won’t increase.
You may be invited to consider adding ‘waiver of premium’ to a policy at extra cost. Doing so will ensure your premiums are paid if you cannot work for an extended period due to illness or injury.
Finally, pay-outs: with term insurance they come as a lump sum. If you believe your family would be better served by a regular income, consider family income benefit policies. They provide a monthly tax-free payment. But beware: the income stops when the term ends, even if you only die shortly before that date.
With some life assurance plans, some or all of your premiums may be paid into investment funds. The policy value may build over time – but the pay-out on your death will also vary depending on how the investments perform. You need to consider carefully the details of the plan and how it works, before you buy.