The different kinds of life insurance

Life insurance might be something that never seemed to be worth your hard-earned pennies. However, with 23% of UK adults [1] saying they feel anxious about their finances at least once a day, and 78% of UK adults [2] concerned about their health, it’s safe to say that a life insurance policy of some sort could be the key to giving you some peace of mind. Whether you’re considering term life insurance, whole of life cover, mortgage protection, over 50s cover or something else (or these phrases mean nothing at all to you!), we’re here to help break down the barriers and make getting life insurance easier for you. 

Life insurance is designed to pay your loved ones a tax free lump sum when you pass away. This money helps to provide for your family when you’re not around anymore to care for them. That’s why life insurance is worth the effort and the extra spend each month: because it buys your loved ones security no matter what. You’re paying to protect them and make sure that financial woes aren’t added to their worries in an already difficult time.

Whilst life insurance typically only pays out in the event of your death, there are other types of insurance available that can cover you if you become seriously ill and you aren’t able to provide financially - such as critical illness cover. 

We know that life insurance can be an intimidating thing to get sorted for you and your family. It might seem a lot more high stakes than insuring your phone or your laptop, and it may seem like a much more long and involved process. With so many different types of insurance to choose from and so many providers, it can seem tricky to know where to even start. 

The reality is that life insurance can be much more affordable and easy to buy than imagined when bought wisely. There are complexities to it, sure, such as considerations about the type of cover, joint cover etcetera. Whilst the price you pay will be dependent upon variables like the state of your health, your lifestyle, your age, if you smoke or drink a lot, and the amount of cover or term of your policy, the most important thing to consider is that the people you love are taken care of. Here at LifeSearch, we want to protect as many families as possible. Let us break it down for you and make life insurance simpler!

Term life insurance

Term life insurance is one of the most commonly bought types of life insurance, and it does what it says on the tin. Term life insurance covers you for a specified amount of time or the ‘term’ of the policy. So for example, if you buy a policy with a 30-year term, if you die within the 30 years of the policy, your loved ones will receive a cash lump sum from your insurer. You choose the length of your term when you buy your policy. This could be up until your mortgage is paid off or until your children become financially independent, and your financial responsibilities lessen. 

There are two different types of term life insurance:

1. Decreasing term life insurance

Decreasing term life insurance is pretty simple. It is an insurance where the level of cover reduces over the term of the policy, normally designed to cover repayment mortgages, so is often also known as Mortgage Life Insurance. If the level of cover and term of the policy matches your current mortgage amount and remaining years, then this policy will make sure there is the right level of cover to pay off your mortgage in full, if you were to pass away during the term.

Your monthly premium will be cheaper than a level term insurance of the same initial amount, however your premium will not reduce over the term of the policy. If you’re on a tight budget and covering your mortgage is your main priority, it’s possible that decreasing term life insurance is the best option for you. The drawback of this type of policy is that it may not be able to leave your family with an additional lump sum once your mortgage has been paid off, as you’d be able to with level-term life insurance. Sure, you’ll be able to leave behind enough to cover the mortgage, but if you want to be able to help out with other expenses or leave a little extra spending money, then level term cover may be worth considering. 

2. Level term life insurance

You’ll also pick a time period for your cover to last when you buy a level term life insurance policy, but the key difference is that your payout will be the same no matter when you make your claim in that period. You choose the cover amount and the length of time you’d like it for, and you could pay the same monthly premiums until the term is over. Level term cover is usually more pricey than decreasing cover as it gives you the security of a fixed sum of money no matter when you make your claim. You can avoid high premiums by ensuring that your lifestyle is healthy and you take out your policy when you’re younger. If you’re worried about not having enough money at the end of a decreasing term policy but not convinced you can afford level term cover, you could speak to one of our expert advisors and see if an option like having a decreasing term policy with a smaller level term policy could be right for you.

One thing to keep in mind about level term cover is that because your payments and payouts are fixed, your payout amount won’t increase with inflation. For example, say you take out a policy that will last 40 years and payout £15,000. That £15,000 won’t be worth the same at the end of the 40 years as it was when you took out the policy. If you want to be certain that your payout will cover your costs, consider an 'indexed link' or Increasing life insurance policy that assures your payout increases in-line with inflation. 

Whole life insurance

If you want to receive a payout no matter when you pass away, term life insurance may not be right for you, but whole of life insurance might do the trick. Whole of life insurance guarantees a lump sum pay out to your loved ones when you pass away, rather than within the confines of your term.

Whole of life cover is generally more expensive than term cover, as the payout is guaranteed, whereas with term cover your policy could end without you receiving a payout. However, the cost of whole of life insurance is affected by a few variables. The more you want your payout to be, the higher your premiums will be as a result, but your premiums will also be affected by your age, health, medical history and lifestyle.

One of the biggest selling points of this type of cover is that it can help your family deal with hefty inheritance tax bills. Your estate includes everything you own - from your car to your cash - and if your estate is worth more than £325,000, your loved ones will have to pay tax on it before they are given access to the estate. Inheritance tax is charged at 40% on anything above the £325,000 threshold [3]. This can put your family in a difficult position and as a result, many are forced to take out a loan just to cover this bill.

A life insurance policy written in trust can help avoid this issue, as the payout will provide the funds needed to help your loved ones clear the inheritance tax bill. Contact your broker or provider to talk to them more about writing an existing policy in trust, or take out a policy through LifeSearch and let us help you create your trust today.

There are two main types of whole of life cover:

1. Balanced/standard cover. 
With this type of cover, your premiums stay the same throughout the policy. You’ll agree on a payout amount when you buy your policy and this will be paid out whenever you pass away. 


2. Maximum cover.
A maximum cover policy works very differently. Your cover will be linked to an investment fund and the insurer will invest the money you pay each month, with the aim that the investment will return enough to cover the cost of the payout. In order to ensure you’ll be covered, your premiums will be periodically reviewed. This helps make sure that your investments are performing. If they aren’t, your insurer may increase your monthly premiums or reduce your eventual payout amount to make sure they can cover it. While these policies are likely to be cheaper initially, premium increases are likely and can, in some cases, be substantial. Whilst we don’t offer this at LifeSearch, you can find this with other providers or we can help get you covered another way. 

Life insurance for mortgage

If you’re thinking about taking out a mortgage, then you ought to be thinking about taking out a life insurance policy too. Paying the mortgage in order to keep a roof over your family’s head is vitally important. 

The average outstanding mortgage debt per household in the UK is £127,420 [4]. Would your family be able to keep up with the mortgage payments without your monthly income? Having a life insurance policy in place to help your loved ones keep up with the costs can be invaluable and save them a lot of stress in an already impossibly difficult time. 

Whilst there isn’t a legal requirement to have mortgage insurance, some mortgage lenders will insist upon it as part of their offer. Mortgage protection insurance runs for the same length of time as your mortgage. If you take out a mortgage over 30 years, your mortgage protection insurance must also be in place for 30 years. If the payout provided is more than what’s left to pay on the mortgage, it automatically passes over into your estate.

Similarly to term life insurance, you can buy level term cover and decreasing term cover. The type of cover you need will depend on your mortgage, so speak to your mortgage advisor and an insurance broker if you’re unsure! 

Over 50’s life insurance

It’s no secret that life insurance costs rise with age and that policies are cheapest to buy when you’re young. Add in a medical condition and your premiums could potentially be sent way beyond the realms of affordability. The older you get, the more difficult it can be to find affordable cover. This is where Over 50's cover comes in. 

We believe that almost everybody can benefit from life protection products, not just the young. Whether you want to ensure your family is able to maintain their standard of living or you’ve recently had to make financial commitments, Over 50’s cover can help your loved ones cover costs after you pass away. It’s also a great option for those wanting to leave some money behind to cover funeral costs. With the average burial alone costing more than £4000 [5], it costs a lot of money to die and that financial burden can be stressful for your loved ones in an already difficult time. If this is something that’s important to you then you may want to look into your potential provider’s funeral benefits options, as some will offer a bigger payout or a discount from a funeral company. 

Over 50’s directly combats the issues facing older people trying to get insurance. It caters specifically to 50-80 year olds (although some providers start from 45 and go up to 85 or 90) and guarantees acceptance, with no medical questions to answer. Payouts and premiums are usually also fixed, so you can choose a premium that suits your budget and your perfect level of cover and rest assured that you’ll be covered. 

There are definitely a few things to be aware of with Over 50’s life cover, however. For instance, you’ll almost always have to have been paying into your Over 50’s life plan for a minimum of one or two years before you can expect the full payout upon a claim. Before this period is over, your loved ones will only receive back what you paid in.

There’s also the fact that you could possibly end up paying more into your policy than you’ll be able to receive. For instance, if you took out your policy at the age of 50 and you paid £25 a month for £10,000 of cover and then you lived past 84 you’ll have paid more than you’ll be receiving. Going through an insurance broker and shopping around should help you make an informed decision, but it’s worth noting that Over 50’s options are slightly more limited than options for other life insurance products as less insurers offer these guaranteed acceptance policies. 

How many life insurance policies can I have?

It’s entirely possible to take out multiple policies, but buying carefully is essential so you’re not just paying for duplicated cover. However if you’re after truly comprehensive cover then having two or maybe even three under your belt could be a good thing. 

Whilst it may make sense for you to have multiple life insurance policies, we would always recommend that you first explore the possibility of amending the terms of your current life insurance policy to meet your needs. You can often increase the amount of cover you currently have or choose additional cover alongside it, and all it could take is a little bump up in premium price. This may solve your problems, and means you’ll avoid having to take out a totally new policy with another provider, which could work out as a more expensive option. However, you might find that making a couple of changes isn’t enough to cover you how you’d like. Let’s take a look at the reasons why you might be interested in having other life insurance policies.

• Family Income Benefit
Life insurance can be important even if it’s just you and your partner, but when you start a family it can make you look at life insurance in a whole new light. Suddenly, you’ll go to any lengths necessary to protect your little ones and quite often, this can start with getting life insurance cover to make sure they’ll be looked after when you’re not around. If you already have existing policies, you might want to look at taking out a Family Income Benefit policy. Family Income Benefit pays out monthly or annually, which helps to cover your family’s living costs with easy to manage payouts. 


• Joint policies
If you’ve taken out a joint policy previously in order to keep costs down, you might be thinking about how you can ensure more comprehensive cover for your loved ones. As joint policies typically only pay out once, when the first person in the couple passes away, it’s possible you’ll be left unprotected. 
For this reason, two single life policies may offer much better value. It’s not a pleasant thought, but if both parents or guardians were to pass away within their policy terms, that’s double the payout to your beneficiaries. Two separate policies may be more expensive but may bring you greater security. 


• Critical Illness Cover/Income Protection Insurance
Critical Illness Cover (CIC) and Income Protection can go hand in hand with your life insurance policy to cover you from all angles. Both cover you should you fall ill or get injured rather than if you pass away, with CIC paying out should you become critically ill and Income Protection paying out a percentage of your monthly salary (usually 50-70%) if you’re signed off work due to illness or injury. 


• Business protection
If you’re after specialist cover that your standard life insurance policy doesn’t quite cover, there are options out there for you. For instance, if you’ve recently started a new business, a product under the business protection umbrella could give you an extra level of cover. 

Business protection refers to a group of products that are designed to help keep a business afloat in the event of death or illness. You can protect your most vital team members with key person cover, business protection allows you to protect business loans, protect your key people with key-person insurance , and ensure business continuity, all in a tax-efficient way.

No matter your situation, there’s a form of life insurance out there for you. With so many choices out on the table, it’s natural to feel a little overwhelmed. If you’re still unsure or you’re worried about getting it right, going through a broker (like us here at LifeSearch) can help make things clearer and ensure you’re getting the right cover for your situation and your wallet! Over two decades we’ve grown to be the biggest and best at what we do, and with an experienced and friendly team of advisers on our end using a wide range of insurers, you can rest assured we’ll help you protect your family.

References

[1] https://www.nerdwallet.com/uk/personal-finance/money-and-mental-health-study/
[2] https://www.bupa.com/news/press-releases/2023/top-health-concerns-for-2023
[3] https://www.gov.uk/inheritance-tax
[4] https://www.finder.com/uk/mortgage-statistics
[5] https://www.moneyhelper.org.uk/en/family-and-care/death-and-bereavement/how-much-does-a-funeral-cost?source=mas