There are four main types of life insurance:
- Level term insurance pays out a lump sum if you die within a set time period. This lump sum amount was agreed when you were setting up the policy, and it does not change.
- Decreasing term insurance is often taken out with repayment mortgages. The amount you are covered for decreases in line with the amount of mortgage you owe.
- Endowment insurance pays out a lump sum if you die within a a set time period. If you do not die within the term, it pays out at the end of the term. So this type of life insurance builds up an investment value. You will have taken out this type of insurance in the past if you’ve had an endowment mortgage (where you only pay the interest to the mortgage lender and the rest is invested in a life insurance policy). Some endowment policies will pay out if you are diagnosed with a critical illness.
- Whole life insurance builds up in value and pays out on death. It can be used as an investment, for protection or both.
Many employers also offer life cover to employees. Cover is usually available to every employee up to a set limit, whatever their state of health. Speak to your HR department at work to find out more. Many employers offer a type of life insurance called ‘death-in-service benefit’. Death in service benefit guarantees a lump-sum payout if you die while working for that employer. You can usually choose who you would want this payment to go to (your beneficiaries). However, sometimes death-in-service payouts go into a discretionary trust, which means you cannot choose exactly who will benefit.
If you consider giving up your work due to ill health, check with your employer what would happen to any life insurance cover they provide.
Over-50s plans are designed to pay a lump sum of money into your estate when you die. They’re mainly intended for anyone aged 50–85 who doesn’t already have a life insurance policy. People with life insurance can still buy over-50s plans and may choose to if they are saving for a particular purpose (such as paying for a funeral) and want to keep this separate from their life insurance.
Over-50s plans don’t require medical underwriting – where insurance companies look at your details to decide whether or not to insure you, and what the terms of that insurance should be. This means your health won’t be taken into account when you are applying for the policy. The payout also isn’t affected if you are in poor health when you take out the policy. For these reasons, over-50s plans can be suitable for people with existing health problems.
The monthly payments are usually an affordable amount, but the final payout is generally modest. If you live for many years after you take out the plan, you may end up paying in much more money than is paid out when you die.
If you die within two years of starting an over-50s plan, there may not necessarily be a full pay-out. But there may be a refund of the money that had been paid into the plan.
Some people prefer to pay for their own funeral using a pre-paid funeral plan. These may be better value for money, but you need to make sure you ask:
- Does the plan cover all the costs of the funeral?
- What happens if the funeral home goes out of business?
- What happens if you die while overseas?