Types of life insurance

The most popular type of life insurance is term insurance. A term insurance policy will payout a lump sum in the event of the death of the life insured within a given term. So for example a 20 year term insurance policy will pay out in the event the named people on the policy die within the next 20 years. If you survive 20 years then the policy ceases and has no value.

There are a few different types of term insurance policy as explained below:

Level term insurance

A level term insurance policy is a policy where the amount of life cover remains the same throughout the term of the policy. This is useful where the life insurance need remains level, for example if it is to pay off an interest-only mortgage in the event of your death. As the mortgage is interest-only the size of the debt remains the same throughout so the level of life insurance also needs to remain level.

Decreasing term insurance

A decreasing term insurance policy is a policy where the sum assured reduces over the term of the policy. This policy is often used to provide for the repayment of any outstanding mortgage if the policyholder dies within the term. This is the cheapest life insurance type and should be seriously considered by anybody with a mortgage.

Increasing term insurance

An increasing term insurance policy is a policy where the sum assured increases over the term of the policy, typically the premiums will also increase over the term of the policy. The policy is designed to allow the sum assured to keep in line with inflation over the term of the policy. This is not widely used because it is really only suits a situation where the life insurance need increases at a steady rate. Typically people's life insurance need jumps (for example when they buy a bigger house) so they will instead typically review all their existing policies and purchase additional life cover if required.

Critical illness insurance

Although not strictly a life insurance policy, critical illness insurance is a policy that is often taken out at the same time as a life insurance policy. A critical illness policy will pay out a lump sum if the life assured is diagnosed with a critical illness during the term of the policy. If a person is diagnosed with a critical illness then a lump sum is useful to pay for any outgoings such as treatment or to replace lost income or to clear a mortgage. The definition of what constitutes a critical illness policy varies from life insurance company to life insurance company.