Different Types of Life Insurance

If you have read our articles, “what is life insurance” and “do I need life insurance” you should now have a basic understanding of what Life Insurance is and why you might need it. Here we are going to go into a little bit of detail about the more common choices for Life insurance.different types of life insurance - lief insurance comes in many flavours

Life insurance can be broken down into 2 main types:

So, to state the obvious, ‘Death’ Life insurance will pay monies to the policy holders beneficiaries in the event of death. Critical Illness will pay monies to the policy holder in the event of critical illness.

For both Death and Illness cover you can have one of two methods of payout:

A lump sum is exactly that, a lump sum that is paid out; An Income payment is a usually monthly payment that serves to replace the income of the policy holder.
For most, the main consideration is not how to make the payout, but under what circumstances it will payout (death or illness) as you should ensure that either an income or lump some payout would cover outstanding debts and support dependants. Below we have described the most important policy types to consider in either event.

Cover in the event of death

Cover in the event of death is essential to ensure your dependants can cover any outstanding financial commitments you held and support their lifestyle for the foreseeable necessary future, for example until your children leave home.

Lump sums

The following policies will pay out a lump sum of money to your beneficiaries in the event of death. These life insurance policies will not provide a monthly income, therefore the funds left after meeting any immediate financial commitments will need to be invested. These lump sums are usually intended for settling outstanding mortgage commitments

Mortgage Protection Insurance

Mortgage Protection Insurance is life insurance that has been taken out specifically to cover outstanding mortgage commitments in the event of your death.
Interest only mortgage and repayment mortgages require different Life Insurance policies to cover them, as a repayment mortgage will have a reducing commitment (the capital you owe reduces over the term) where as an interest only mortgage has a fixed commitment.

Interest Only Mortgages(Level Term Insurance)

With an interest only mortgage you are only making interest payments, as such the capital you owe does not reduce over the mortgage term. It is therefore necessary for your life insurance policy to pay out the same amount on day one as it will on day 16 of the 24th year for example. The most suited life insurance policy to protect an interest only mortgage is Level Term Insurance as the payout remains ‘level’ thought the ‘term’ of the insurance policy.

Repayment Mortgage (Decreasing Term Insurance)

With a repayment mortgage you are repaying both capital and interest, as such the total loan amount will decrease over the term of the mortgage. It makes sense therefore to ensure you life insurance policy does the same. The most suited life insurance policy to protect a repayment mortgage is Decreasing Term Insurance. With decreasing term insurance the payout will ‘reduce’ over the ‘term’ of the insurance. When referring to Mortgage Protection Insurance it will be assumed you are referring to Decreasing Term Insurance.

Decreasing term insurance will cost less than level term insurance over the same period as the insurance companies risk is ever reducing (as each day passes the payout reduces).

With both of these policy types you will notice they are called ‘term insurances’, this refers to the life span of the policy. With a term life insurance policy your beneficiaries will only receive a payout if your death occurs within this term. If your death occurs outside of this term your beneficiaries will receive no payout.

Income

Family Income Benefit (FIB)

Family Income Benefit is a type of Life Insurance policy which will pay out a regular, tax free income to the beneficiaries in the event of your death. This option can suit those who do not wish to deal with the worries of a large lump sum such as finding suitable investment vehicles in which to hold the money however they are rarely protection enough on their own.

Family income benefit is also a term insurance which means after the term has completed you are no longer insured; it is often considered in conjunction with mortgage protection insurance.

Cover in the event of illness

Lump sum

Critical Illness Cover

Critical Illness Cover (CIC) or critical illness insurance as it is also known will pay out a lump some to the policy holder (who is also the beneficiary) upon diagnoses of a critical illness.

Critical illness cover does not cover all critical illness’, in most cases there will be a list of some 30 or more illness’ upon diagnosis of which the insurer will pay out.
Some Common examples of critical illness are:

Critical illness usually covers disabilities of sorts such as deafness and loss of limbs or sight and is also a term insurance.

Income

Income Protection Insurance or Income Replacement Insurance (Permanent Health Insurance – PHI)

Income Protection, also referred to Income Replacement or Permanent Health Insurance (PHI), provides the policyholder with a regular monthly income (of up to 50% of your earnings) should an illness or an accident prevent them from working. The policy will continue to pay the income until the policy holder returns to work or retires.