Starting a family is a huge milestone, but with so many uncertainties in life, it’s important to provide them with the necessary security. Thankfully, there are several types of life insurance that can protect your loved ones when you pass away.
How does life insurance work?
Life insurance is a type of insurance policy that covers a person in the event of their death. When the person dies, the insurer issues a lump sum payment to their family. This money can support families in several ways during this difficult time.
When you take out cover, you pay monthly payments to your insurance provider. If you cannot keep up with these payments, your insurer may end your cover early.
When applying for life insurance, make sure you are aware of:
- The type of policy you need
- The amount of cover your family will need
- How long you want to be covered for
Among many things, the payout from a life insurance policy can help your family to cover finances, such as:
- Day-to-day living costs
- Household bills
- Funeral costs
- Rent or mortgage payments
- Childcare support
- Outstanding loans & debts
So which type of life insurance is best suited for families?
Whole life insurance
With whole life insurance, the hint is in the name. This policy type covers you for the rest of your life, paying out a cash lump sum to your family upon your death.
While it’s one of the most expensive types of cover, it provides permanent protection, paying out no matter when you eventually die. It’s also known to insurance companies as ‘life assurance’.
Whole life insurance comes in two forms of cover:
- Balanced cover – The standard type of whole life cover. Both your premiums and pay-out value are fixed throughout the policy. This means your family receives the same amount whether you die five years into the policy or thirty.
- Maximum cover – Your insurer invests the money paid for your premiums to cover the eventual pay-out amount.
This has both risk and reward elements. If the investment performs better than expected, bonuses can be added to your policy. However, if it fails, your premiums could be increased to cover the loss.
There are other types of whole of life policies designed as a cheaper alternative, such as guaranteed life insurance. This policy guarantees acceptance for those aged 50 and over, who would otherwise struggle to afford cover. Because of this, the payout value is much lower than that of a regular whole life policy.
Term life insurance
As the standard form of life cover, term life insurance is generally much cheaper than whole life. It covers you for a set period of time rather than permanently. You choose the length of cover (20 years, for example) agreed upon with your insurer.
Term life insurance has 3 main types:
- Level term life cover – Your premiums and pay-out amount remain the same throughout your cover.
- Decreasing term life cover – Typically taken out alongside large payments your family would struggle to pay back on their own, such as a mortgage. The payout value decreases over time as you make repayments.
- Increasing term life cover – Protects the eventual payout amount from inflation by increasing over time. The value of the payout your family receives is to be equivalent to when you first took out cover.
Joint life insurance
If you and your partner/spouse share an income, you may want to consider a joint policy. A popular choice for couples, covering two people under a single life insurance policy. Many couples find it easier to manage as well as cheaper than two single policies.
Joint life insurance works in two forms – first death & second death.
First death pays out after the first death within the couple, the policy then expires. Second death pays out once both you and your partner die. In this case, the payout can then be used to provide support for your children or selected beneficiary.
How much does life insurance cost?
The cost of life insurance cover depends on a number of factors regarding your health and lifestyle. The type of cover you want also affects the cost of your premiums.
When applying for life insurance, your insurer will ask a few questions to calculate the cost of your policy. These are usually regarding details, such as:
- Your age
- Height & weight
- If you are a smoker
- Type of cover you want
- Length of cover needed
Unfortunately, as you get older, the cost of life insurance rises significantly. If you’re looking to save money on cover, it’s best to take out a policy at the earliest stage when premiums are cheapest.
Smoking, whilst being bad for your health, also increases the cost of life insurance. People who smoke usually pay much more for premiums than non-smokers, however, you can cut costs by agreeing to quit. Your premiums are typically lowered once you have remained smoke-free for 12 months.