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There are four main types of Life Insurance available that provide financial protection in the event that the policyholder passes. Each type of Life Insurance is typically designed for specific individual circumstances and it is worthwhile knowing which cover is best suited to your needs.

Level Life Insurance

A Level Life Insurance policy that is designed to pay out a lump sum benefit upon the death of the policyholder, during the term of the policy. The sum assured remains the same, or 'level', throughout the policy term so you know that if you take out a policy for £200,000 over 10 years, it will still be worth £200,000 in 9 years and 11 months. Level Life Insurance is perfect for those who have an Interest Only mortgage, or want to ensure that their family has good financial security should the worst happen.

Decreasing Life Insurance

Decreasing Life Insurance does exactly what it sounds like. Every year or month, depending upon the insurer, the sum assured of your policy will decrease. This means that if you start out with a policy of £150,000 over 12 years, the sum assured will decrease throughout that time period until the sum assured reaches zero. A Decreasing Life Insurance policy will typically be recommended for those who have a Capital & Repayment mortgage or any form of loan, where the liability reduces every year.

Increasing Life Insurance

An Increasing Life Insurance policy again pretty much does exactly what you think it will do. The sum assured will increase every year to offset the effects of inflation. By taking this option you will ensure that the value of the policy sum assured that you take out now will stay the same throughout the policy. By choosing an increasing option the policy premiums will in turn increase each year. The insurance provider will usually write to you each year to confirm that you want the increase to take place, you are able to opt out of the increase if you wish.

Whole of Life Cover

Whole of Life cover is an insurance that lasts for the duration of your life, there is no set policy end date. As you are insuring yourself for your entire life you are almost automatically guaranteed a claim payout when you die; provided that policy premiums are up to date and the original application is wholly accurate. This makes the cover the most expensive Life Insurance of those discussed and is typically used for funeral expenses or those who are looking for a sum assured of £20,000 or lower.

What does this actually mean?

The easiest way to explain the differences between the cover is to provide you with an example of the potential cost of having the policy. The table below shows the basic monthly premium that could be available to a 30 year old non-smoker:

Type of Cover Example Sum Assured Example Policy Term Potential Monthly Premium*
Level Life £250,000.00 35 years £14.31
Decreasing Life £250,000.00 35 years £10.85
Increasing Life £250,000.00 35 years £14.69
Whole of Life £15,000.00 No end date £8.01
Whole of Life £250,000.00 No end date £84.56

Premiums based on being accepted standard terms.

The base premiums above are assuming that your application will be pretty clear cut, with no significant medical history or hazardous occupation to declare. Where an insurer feels that your application contains significant disclosures you may find that the policy premiums are increased.

The most significant comparison in the table is that of Whole of Life cover compared to the others available. Whilst the monthly premium is much higher or sum assured much lower, it is the only plan that is guaranteed to pay out one day (as long as premiums are kept up), as there is no end date.

The premium difference between Level and Increasing Life Insurances is somewhat negligible. If you do opt for the Increasing Life Insurance your decision is not set in stone as you are able to decline the RPI linking each year, if you wish to do so. A Decreasing Life Insurance will usually be the cheapest option, when you consider the sum assured on offer, as the insurer knows that the potential risk of them making a large financial payout in a claim reduces each year.

With any Life Insurance policy your primary focus should be upon taking out the cover that suits your needs and concerns for future financial planning. If you are unsure as to which Life Insurance type is the right option for you please feel free to speak to one of our insurance advisers for a no-obligation quote.

*Research conducted as of 12th June 2014

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