The most basic type of life insurance is called term insurance. With term insurance you choose the amount you want to be insured for and the period for which you want cover. If you die within the term, the policy pays out to your beneficiaries. If you don't die during the term, the policy doesn't pay out and the premiums you've paid are not returned to you.
There are two main types of term assurance to consider - level-term and decreasing-term insurance. Sometimes a combination of the two is the best answer.
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Level Term Insurance
A level term policy with Death Cover pays out a lump sum if you die within the specified term. The amount you're covered for remains level throughout the term: hence the name. The monthly or annual premiums you pay will either be guaranteed or reviewable.
A level term policy can be a good option for family protection, where you want to leave a lump sum that your family can invest to live on after you've gone. It can also be a good option if you need a specified amount of cover for a certain length of time, e.g. to cover an interest only mortgage that's not covered by an endowment policy.
Decreasing Term Insurance
With a decreasing-term policy, the amount you're covered for decreases over the term of the policy. These policies are often used to cover a debt that reduces over time, such as a repayment mortgages. The main difference with a Mortgage Protection Policy is that it is often possible to select an option that guarantees to repay the loan rather than reduce at a set interest rate.
The premiums are usually significantly cheaper than for level-term cover as the amount insured reduces as time goes on. Decreasing-term insurance policies can also be used for inheritance tax planning purposes when a potentially exempt gift is made.
Family Income Benefit
Family income benefit life insurance is a type of decreasing term policy. Instead of a lump sum, though, it pays out a regular income to your beneficiaries until the policy's expiry date if you die.
The upside of family income benefit is that it's easier to work out how much you need. For example, if you take home £2,000 a month, you can arrange for the same amount to be paid out to your family if you die.
Term Assurance policies are also used to offer Critical Illness cover and Income Protection Benefit (Permanent Health Insurance) where there is a need for protection over a specified period of time.
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