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The Different Kinds of Life Insurance

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.

  • 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.

  • 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.

  • 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.

  • 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.)

  • 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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