Types of Life Insurance
Most life polices are single life polices. That means that only one life is insured. A person can take a policy out on their own life. That is called an own life policy. Alternatively someone may take out a policy on the life of another person. That is called a life of another life insurance policy and there must be some insurable interest. For instance a wife insuring her husband or visa versa.
Often a husband and wife will take out a policy on their joint lives. In these cases the choice is between a policy that pays out on the death of the first life insured or one that pays out on the death of the second life insured. The first death policies are usually taken out with a view to protecting the family. Second death polices are often used in inheritance tax planning. The premium for a first death policy would always be a little more expensive than a second death policy.
The three basic types of life insurance policy are ‘term life’, ‘whole life’ and finally ‘endowment’.
Under a term life policy the policy will only pay out if the life insured dies within the policy term. If the life insured dies outside of the policy term then the policy will not pay.
Level term is the simplest type of term policy with a level sum insured during the whole of the policy period.
Reducing term cover is where the sum insured reduces either each year or each month by a set amount. These policies are often used to cover the reducing outstanding balance of a repayment mortgage.
Renewalable term allows for the policy to be renewed at the end of the term without the need for a medical. These are usually only on offer if the life insured will be below a maximum age limit when the term of the first policy expires.
Convertible term policy includes an option within the policy for it to be converted into a whole life or endowment policy without the need to the life insured to under go any medical. If the policy is converted then the premium will change to reflect the new basis of the policy. There may be terms and conditions attached to when the conversion can take place.
Under a whole life policy the insurer agrees to issue the policy for the whole of the life insured’s life provided that the life insurance premium continues to be paid. It is common for whole life polices to start off with a low sum insured and for the sum insured to increase as more premiums are paid into the fund. These policies are said to have an investment factor and if maintained for long enough can be cashed in.
Endowment policies run for a fixed term but include an element of investment. They will either pay out if the life insured dies during the term of the policy or on the maturity date of the policy when it reaches the end of the term insured. These policies can be arranged so that there is a mix between insurance element of the policy and the investment factor. Sometimes these policies are used as an investment vehicle to pay of a mortgage, however it must be remembered that investments are not guaranteed to match expectations and it is possible for a short fall to occur.
This article does not represent ‘financial advice’ as each persons individual requirements will be unique to their needs. If there is something in the article which you which to rely on then please check those details with any person from whom you purchase a term life policy at the time of purchase.
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