You should first look at term insurance. This temporary form of life insurance is offered by most insurance companies, a number of friendly societies and relative newcomers to the financial marketplace such as Marks & Spencer and Virgin.
It's based on a simple concept - the insurer guarantees to pay the policy benefits if you die within a given time. If you survive to the end of the policy's term, no benefit will be paid.
The term of the policy depends upon you and may be anything from a few years to several decades but it should coincide with your need for protection. Policies may be written on your life or on the life of yourself and your partner. Term insurance is the least expensive form of life cover.
TIP: Premiums for men tend to be higher because on average they do not live as long as women. And premiums for smokers are more expensive.
There are a number of different types of term insurance so you need to buy the one most appropriate for your needs.
Level term: The benefit payable on death remains the same throughout the policy's term. At the end of the term the policy has no value and simply expires. Level term insurance is often bought to cover the repayment of a fixed loan - an interest-only loan, for example - in the event of death.
Decreasing term: This is also known as mortgage protection insurance. The benefit payable on death decreases in stages each year until it is zero by the end of the policy's term. Such insurance is often used in tandem with the purchase of a repayment mortgage whose capital value falls over the mortgage term.
Convertible term: Term insurance may be converted into permanent cover when your original policy's term comes to an end, usually by buying whole-of-life insurance or an endowment policy. Its main attraction is that you cannot be refused the right to take out the new policy no matter what the state of your health.
However, there are a number of rules governing conversion. Firstly, you cannot increase the sum assured when you convert - it is restricted to the amount on the original policy. Secondly, you must convert before your term insurance ends. Thirdly, though you cannot be refused conversion, the new premiums you pay will be determined by your age and sex - but not your state of health - which means they will inevitably rise. Finally, conversion comes at a price and it tends to be 10 per cent more expensive than basic level term insurance.
Renewable term: This allows you to exchange your term insurance for another policy at the end of the term. The big attraction is that you have guaranteed insurability - you will be insured irrespective of your state of health when you come to renew. Renewable term insurance is often offered as an option on convertible term policies and vice versa.
Increasing term: The sum assured increases during the policy's life, typically by 5 or 10 per cent a year. This costs more than level term insurance, but your benefits are protected against the ravages of inflation. The right to increase the sum assured usually ends when you reach 65.
Family income benefit: Benefit is paid on a regular basis from the death of the policyholder to the expiry of the policy's term. Policies are usually written on a joint basis which means income payments are made as soon as one partner dies. They are also usually written to coincide with the expected period of dependency of the youngest child in the family. Policies may be arranged that will pay a level income or an income that rises by a predetermined amount each year. |
