Life insurance
Life insurance is about providing some financial security for people who depend on you financially. There are different types depending on your circumstances.
What it does
Life insurance will pay out a lump sum or fixed regular income either when you die (if a whole of life policy) or if you die within a specified term (term insurance). Some whole-of-life policies also contain an investment element to them, but such investment-type policies cost a lot more than protection-only insurance.
If you want investments, consider the full range of products (not just life insurance) which might meet your circumstances and needs – see the Investments section of this site.
Term insurance (or assurance)
This is the simplest and cheapest type of life insurance, and is known as term insurance because you choose how long you're covered for, say, 10, 15, or 20 years (the term).
It only pays out if you die within the term you've agreed. If you live longer than the term, you get nothing. As a couple, you can also take out term cover in both your names, with the policy paying out on the first death only during the term.
There are different types of policy you can have:
- family income benefit (a policy which pays out income rather than a lump sum);
- increasing policy (where cover and premium rise over the years);
- decreasing policy (where cover and premium fall over the years); or
- renewable policy (which lets you extend the original term).
Decreasing term insurance is often linked to a repayment mortgage (where the amount you owe decreases over time) and may, in this instance, be called mortgage term insurance or mortgage protection life insurance.
The premiums you pay are usually fixed for the whole term. There are also contracts where premiums are reviewable after a certain period, usually five years.
Whole-of-life insurance
Whole-of-life insurance pays out an agreed sum when you die, whenever that is, as long as you are still paying the premiums.
Cost
Whole of life policies will cost more than term insurance policies, partly because they will pay out whenever you die, but also because of the various charges that come with them. The cost of either type depends mainly of the likelihood of the insurer having to pay out – so if you're a smoker and do a dangerous job, you'll pay more than a non-smoking office worker. Life insurance also costs more for men because, on average, they don't live as long as women.
Always compare what's covered by a policy, not just the price. Some might be cheaper than others, but they may not offer the same level of protection.
Key things to think about
- Check for exclusions – in other words when the policy won't pay out. For example, most do not cover death due to alcohol or drug abuse. You might not be covered while taking part in risky sports. If your health is poor when the policy starts, some causes of death might be excluded or you might be refused cover altogether.
- How flexible is the contract? Can you reduce or increase cover easily as your circumstances change? Are there extra charges for doing this? Does cover stop immediately if you miss a payment or is there a period of grace?
- By paying extra, you can usually include a waiver of premium. It pays the premiums if you can't work because of a long-term illness so that your cover is not interrupted.
- If you want to change insurer, check the level of premiums for the new contract before switching (premiums may have gone up because of older age or because you have developed medical conditions). Also check the new level of cover compared to the previous one. Different benefits may be available, and different exclusions may be applied, for example you may not be covered for medical conditions that have developed before the switch even if these were covered under the previous contract. If you do decide to change, make sure you do not cancel your original cover until you are fully covered by the new contract.
- The policy can be set up under trust. This means that in the event of death, proceeds of the policy are paid directly to dependant(s) of your choice. Provided a trust is set up properly, there may be benefits to doing this. However, using a trust may not be suitable for everyone and because of the complexities we recommend you seek financial and legal advice. For more information see Getting help with money decisions.
What it does
Stand-alone Pension Term Assurance (PTA) is term insurance which uses the rules for pension schemes to provide life cover. Despite the name, this does not have to form part of your pension. It pays out on your death rather than giving you an income in retirement. PTA won't necessarily be called pension term assurance; firms can use their own marketing names for it, so make sure you read the policy documents and understand what you're buying.
Changes to the tax rules in 2007 means that stand-alone PTA no longer has a tax advantage over ordinary term insurance products. However, if you already have a PTA policy that gets tax relief you will not be affected. If you are considering PTA, you should also look at ordinary term insurance and decide which product best meets your needs.
If you have an existing policy where you can increase your cover by paying higher premiums, you will still get tax relief on those increased premiums. However, if your policy doesn't include this option, you won't be able to increase cover and get tax relief on higher premiums.
Key things to think about
- Make sure you don't lose out by switching. Your current policy may include cover options which are not offered under the new policy you are considering.
- Remember that PTA policies in force before 31 July 2007 will still get tax relief on the premiums. Switching to an ordinary term insurance policy will mean you lose this advantage. It also means that new PTA policies no longer have a tax advantage over ordinary term insurance policies.
- Don't cancel your current policy until you are sure you have another policy in place – you could leave yourself uninsured.
- If your health has deteriorated since taking out your existing policy, this may mean that the premiums for a new policy are more expensive and you might be better off not switching.
