Types of life insurance - how should you choose?


Published  15 July 2022
   5 min read

Life insurance is designed to pay out a lump sum when you die during the term of the policy. There is no one-size-fits-all category, so different types of life insurance are available to help people have a choice of cover that suits their lifestyle.

Life insurance can require more thought than other types of insurance. For example, when people are looking to insure a car, they mostly want the same thing; to ensure that they are protected financially in the event of an accident and can get back on the road as quickly as possible. Life insurance works in exactly the same way but, because the impact of losing a loved one can be much more far reaching, there is more to consider.

Not sure which type of cover is suitable for you? Here’s a basic guide to the main types of life insurance cover.

How does life insurance work?

Life insurance works by paying out a sum of money if you die during the term of your policy. You might want it to financially support your family on a daily basis with money to live on, such as day to day living expenses or school fees. Or you might want a lump sum payout to cover an outstanding debt such as a mortgage. Your choice of life insurance will depend on your individual or family circumstances.

Life Insurance has no cash-in value – it’s a protection policy only. If you stop making payments, your cover ends and you won’t get anything back.


What are the different types of life insurance?

As we explained above, there are various types of life insurance cover to choose between. If you’re applying directly with an insurance provider, it’s important to select the most suitable one for your circumstances.

Considering going down the financial adviser route? They’ll help guide you through the entire process and give you advice on which policies might be most suitable for your needs. Financial advisers may charge for their services but they should tell you about these charges upfront. Whichever option you take, your age, health, lifestyle and how much cover you need will all determine how much you pay every month.


Level term life insurance cover

Level term insurance is probably the most common and most straightforward type of life insurance. It lets you choose the amount you want to be insured for and how long you want the cover to last. If you die within the term, the policy will pay out to your loved ones. If you survive the policy, your money will not be returned to you. However, the amount you're covered for will remain the same throughout the term.

To give an example, you might set a level term life insurance policy at 20 years with an £80,000 pay-out. This would mean that if you died at any time during that 20-year term, your loved ones would receive £80,000. It doesn't matter if you die after the first year or in the last year of the policy: the pay-out stays the same.

Decreasing term life insurance cover

With decreasing term life insurance (also known as mortgage life insurance), the amount you’re covered for decreases over the term of your policy. Your monthly payments still remain the same though, so you’ll know exactly what you are paying each month. Typically, these types of policies are used to cover a debt that reduces over time such as repayment on a mortgage.

Whole of life cover

This type of policy is designed to cover you for the whole of your life – no matter what age you die. You can decide how much you’d like to pay into it each month and for how long. Because it has no fixed term, whole of life insurance can often be more expensive than other policies, particularly if you are in poor health or have a history of medical conditions. It’s also typically only available through specialist providers.

Critical illness insurance

Critical illness cover can be sold on its own or as an optional extra alongside life insurance. It’s meant to help your family in the event you develop a serious health issue. If you are diagnosed with a critical illness that’s defined in your policy, you could receive a lump sum payment to help cover your care costs.

Things to consider when choosing life insurance

Here are some of the decisions you need to make when thinking about which kind of life insurance is right for you:


Do I want a single or a joint policy?

It is possible to get insurance that covers one person (a single-life policy) or a joint-life policy for a couple. With a joint-life policy, you can decide if you want it to pay out on the first death (useful for paying off a mortgage or protecting dependants) or the second death (which can help with inheritance planning).

It’s tempting if only one of you earns an income to decide to insure just that one life, but you should consider the financial implications of a caregiver passing away as well. The financial burden of providing for childcare or care of an elderly relative could be high, so this should be taken into consideration.

If different levels of cover are required – if one partner earns a lot more than the other, for example – it may be more sensible to take out two single-life policies. A broker or financial adviser may be able to help you find the best solution. Find out more about the differences between joint and single life insurance, here.


How much life insurance do I need?

If you have a particular debt in mind that you think your family will need to cover if you were to suddenly pass away, then you should insure yourself for this amount. If it is a mortgage, you could consider mortgage protection insurance, which exists for this very purpose, as well as life insurance.

Otherwise, consider your family’s future outgoings, as well as your current income when deciding how much might be sensible. You might want to factor in inflation as well. It is easy to forget how rising prices over time can have an impact on family income needs - shopping bills, school fees, house prices may rise in future, so your family will need more to live on.


Should the policy be written in trust?

Life insurance policies can also be written in trust. This means the benefits can be paid direct to whoever you want to receive the pay-out, without it becoming part of your estate. This is useful because your survivors could receive the pay-out more quickly and it is currently not subject to inheritance tax.

Want to learn more about life insurance?

Learn more about the different life insurance products available to you at Royal London, or read our expert guide which answers your most frequently asked questions about life insurance.

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