How-to Guides » OLD GUIDE Get the right type of life insurance

Decide which type of policy you need

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There are several different types of life insurance policies, so it's really important you pick the right policy for your needs. Here are the three main types:

1. Level term assurance - This type of insurance provides you with a cash lump sum, if a claim is made within the set period of time you choose (the term).

So, let's say your mortgage is £150,000, which you'll repay over a term of 25 years. In this case, you might choose a 25-year level term assurance policy with a sum assured of £150,000. This means you'll receive £150,000 as a cash lump sum, should you need to claim on the policy at any point over the next 25 years.

2. Decreasing term assurance - If you want to keep the cost of life cover down, you could go for a decreasing term assurance policy instead. A decreasing policy is specifically designed to provide cover for a debt which reduces in size over time, such as a repayment mortgage.

A decreasing term assurance plan will always pay out just enough cash to cover the outstanding mortgage at the point a claim is made.

This is how it differs from a level policy. Remember, with a level policy, your cover stays the level throughout the term, even though your debt is decreasing. So a level policy could provide a surplus amount above and beyond the mortgage debt. This is why a level policy is more expensive than a decreasing policy. 

3. Family income benefit - This type of policy pays out an income from the time a claim is made until the end of the policy term.

So how family income benefit work?  Let's say you want to provide your family with a yearly income of £20,000 for the next 20 years. This means when the policy starts, you'll need to insure yourself for £400,000.

I know that sounds like a lot, but if a claim was made in the first year, the £400,000 worth of cover will be used to pay out £20,000 a year to your family for the next 20 years. 

For each year where there is no claim, the cover reduces by £20,000. So that means, if a claim was made after 14 years, the total amount of cover would drop to £120,000 - that is, £20,000 paid out every year for the remaining six years of the policy.

In terms of costs, family income benefit should work out cheaper than the level policy I mentioned earlier, because the cover reduces over time (whereas with a level plan the amount of cover always stays the same).

Compare life insurance policies using the lovemoney.com life insurance service.

Next task: Decide how much cover you need and for how long.

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