Life insurance is designed to provide financial security for dependents in case of death of the main breadwinner. In perfect scenario, money obtained from the insurance should be enough to clear debts and mortgage of the deceased and provide a small consolation amount to the his or her relatives. There are a few types of life insurances in the UK.
Level term insurance
Basic and most common life insurance. The policy lasts for specific number of years, agreed with the insurer. If the insured person dies during pre-agreed period, the beneficiaries receive the lump sum from the policy. Monthly premiums stay at the same level and so does the amount the insurance covers for. This insurance is affordable for most people, has simple structure and can cover general expenses with paid out lump sum or be related to fixed debt like interest-only mortgage.
Decreasing-term life insurance
This is also referred to as mortgage protection, as it is widely used to cover a debt of mortgage. Since mortgage decreases over time, so does the amount the breadwinner is covered for. Premiums in such insurances are typically cheaper than those in level policies. The aim of this insurance is to provide protection for dependents who won’t be able to pay rest of mortgage after the insured person dies. This insurance ends when the mortgage is fully paid.
Family income benefit insurance
The idea behind this policy is like in term one, but the difference lies in the structure of payments after the death of the insured person. Instead of providing a lump sum to the family, dependents receive regular income for the remaining term, on which the insurance was agreed for. This is useful for families, where there is one main earner. In case of his death, the standard of life of his relatives won’t necessarily have to decrease significantly. The only problem with this insurance is when the breadwinner dies at the end of term since the relatives won’t receive income for long time after his death.
Whole-of-life insurance
As the name suggests it is a policy that runs for the entire life of the insured person. Whenever he or she dies, dependents get a lump sum. Premiums in this insurance are high, since it is certain that the money the policy covered for would need to be paid out at some point. The lump sum can be used for general purposes, like organizing a funeral, but also for inheritance tax planning.
