This type of insurance policy explicitly guarantees the insurance beneficiary a predefined payment irrespective of when the insurance benefactor dies. This is unlike the other types of insurance cover that is only obligated to make payment to the beneficiary if the insurance sponsor dies before a specific date.
This is perfect for a hypothetical scenario where the insurance in only needed to ensure payment for a mortgage that typically last for 25 years. Whole-of-life policies usually cost more than other types of cover, this is expected because the cover is guaranteed to issue payment at some point in the future.
Term insurance is an alternative to be considered in the quest for a cheaper life insurance policy
Term insurance also known as term life insurance offers a guaranteed payment to a family provided that the insurance sponsor passes away within a specific period of time. As it were, the paradigm of insurance benefactors is to make sure that in event of the unexpected, their dependants will be able to cover living expenses like a mortgage or loss of income.
Bearing in mind that a typical mortgage is paid off in 25 years, it is absolutely unnecessary to extend the life cover beyond this period. Likewise, a policy holder may want the cover to elapse after the children have finished schooling and consequently are independent.
Limiting the policy term of a life insurance in this manner will lower the premium to be paid as against whole-life-cover. This type of policy is also referred to as level-term assurance due to the fact that the insurance layout is the same irrespective of the time that the policyholder dies.
Decreasing-Term Insurance (also known as mortgage life insurance)
There is an alternative option for the prospective holders of term life insurance to have the premium reduce every year. Such a measure is usually adopted to correlate with the eventual decline of mortgage debts as more outstanding debt is settled each year.
An example is seen in a hypothetical scenario where someone took a 25-year life term insurance to cover for a £150,000 which correlates with a 25-year mortgage debt. However, after 15 years, a considerable amount of the debt would have been paid off by the mortgage holder.
In order to prevent a situation where the policy holder pays more than is required in premiums, decreasing term insurance comes to play in such situations; in essence, the premium will become lower than the normal term insurance.
Increasing Term Insurance
In contrast to decreasing-term insurance, a policyholder may request that the potential payout increase every year to reflect a marginal increase in inflation. With an index-linked policy one can choose to link insurance payout directly to an inflation measure such as the Retail Prices Index (RPI) or Consumer Prices Index (CPI), make a predefined arrangement for the extent of cover to rise by a fixed percentage annually.
As such, the premium payable will be higher than level term and decreasing term insurance.
Renewable Term Insurance
In this type of policy, the cover is provided for a fixed period only. An example is health insurance where the period can be extended after it elapses without the need for a further medical check. Although the premium may increase as the policyholder grows older but health issues that arise after the initial policy was taken out will not be considered in the new cost of the policy.
Joint Life Insurance
This is a single policy that will be payable in the event of the death of one of the couple. This is usually cheaper than paying premiums on two separate policies. It is noteworthy to bear in mind that a joint policy will pay out on the first death which also terminates the policy cover. In the event where there are two separate policies, the second policy will remain valid regardless of claims on the first policy.
There are a number of corporate organizations that offer the family of staff a lump sum upon demise while in active service with the firm regardless whether the death is associated with their job. Also members of company pension schemes may also be entitled to payments from the pension if they die before retirement.
It is important to take note of the fact that life insurance cover payment is equivalent to three or four years salary in event of a death-in-service. Unfortunately, this amount might not cover the needs of the family and the policy cover may end as soon as one leaves the company.