What is life insurance?
Life insurance policies pay out a lump sum (known as the ‘sum insured’) when the policyholder passes away. There are several different types of policy and the right one for you will depend on a number of different things, for example:
- How much cover you want
- Whether you want the sum insured to cover a specific debt (like a mortgage)
- How much you can afford to pay in premiums each insurancemonth
How does life insurance work?
Policies work in different ways depending on the plan you have. Broadly speaking, there are two main types of life insurance – term and whole-of-life policies.
Term policies cover you for a fixed length of time (known as the policy term). The most popular term policies are:
- Level term cover where the amount of cover is also fixed so it doesn’t matter when you pass away, as long as you do so within the policy term, the amount of money paid out is the same.
- Decreasing term where the amount of cover gets smaller in time, usually in line with a specific debt (like a mortgage or car loan). For example, if you had a 25-year plan then your dependents would receive more money if you passed away in year five than they would if you died in year 20.
Other types of term policy are available and you may find they suit your needs better, for instance – increasing term, convertible term and renewable term cover.
In contrast, whole-of-life policies have no fixed term and cover you for the entirety of your life. As you’d expect, these policies tend to be more expensive than term cover because there is no policy end date. They do, however, guarantee beneficiaries a lump sum payment when you pass away (subject to any conditions set out in your policy).