The most typical kind of life insurance is one where you set an amount with
your insurer that will be paid out in the event of your death - in the form of a
lump sum or regular part payments.
There are quite a few variations on this basic type of insurance. Often the
insurance company will offer a combined type of policy that covers you in the
event of your death, as well as against the risk of contracting a terminal
illness, or being permanently disabled. These types of hybrid policies are
becoming more common.
There are also different types of payment options and, because life insurance
is based a specific event (your death), you can also take out a policy that will
pay out after you reach a specific age - making it a form of pension policy at
the same time. However you need to exercise care here, as many policies have set
expiry dates, meaning that they will not pay out anything should you still be
alive at the time of expiry.
The other thing to be very clear on, is that no matter how long you have been
paying your premiums for, if you stop paying premiums, the policy will lapse and
you will either not be paid out anything on it, or it will be made paid up and
you will receive a reduced amount on your death.
The basic types of life insurance
- Level term insurance - this is a life insurance policy that will pay you
out a predetermined and agreed lump sum of money should you die during the
term of the policy. This amount of money is fixed from the outset.
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- Decreasing term life insurance - this is where the sum that will be paid
out is designed to decrease during the lifetime of the policy. This is a
type of policy that is designed to cover specific expenses (although these
expenses do not have to be specified). The most common use for this type of
policy is to cover your house bond - you take out the policy with a high
initial payout amount, so that if you die early, while there is a lot of
money outstanding on your bond, this will be covered. As you live longer,
your bond becomes smaller and smaller, and hence your policy payout
decreases accordingly.
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- Renewable term insurance - is where your insurance policy is taken out
for a specified time, with a scheduled expiry date. On that date you can
renew the policy if you choose to do so.
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- Convertible term insurance - this is a form of level term insurance
which you have the option of converting into another type of insurance -
either a whole life policy or an endowment insurance policy (we discuss
these a little further on in this guide.
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- Increasing term insurance - we would go so far as to say that this is
almost mandatory these days. It's a policy that is designed to take
inflation into account. As the years pass, the sum of money that you have
decided you need to have paid out when you die will lose value, relative to
the cost of living. This type of policy builds inflation in - meaning that
the sum you will be paid out increases by an agreed inflation rate each
year. Your premiums are also designed to take this into account of course.
(As an addendum to this - most normal insurance policies can be inflation
linked - so this type of insurance can be built in to the other policy
types.)
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- Index linked term insurance - this is similar to the above type, except
that the premiums and payout are linked to the cost of living as defined by
the Consumer Price Index (CPIX).
Endowment life insurance
Endowment policies are essentially a type of savings plan with life insurance
added on. They are usually taken out for a fixed term - often as part of your
house bond, and are therefore used to ensure that your bond can be paid off in
the event of your death. They will usually pay out a lump sum in the case of
that, or pay out a dividend to you once they expire.
Family income benefit
This is the option we referred to above, where your family gets the amount
that you have insured for in the form of regular payments. You set the total
amount to be paid out, the amount of each payment, and the term of the payments.
This ensures that your family will receive regular income, rather than one big
payout - the advantage being twofold - a regular income stream, and protection
against the accidental squandering of a large lump sum (be that from
overspending or an ill-advised investment).
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