What type of life insurance do I need?


There are several types of life insurance to choose from. It’s important to understand the differences between them so that you can pick the right kind of cover to suit your needs. Here, we explain what the different kinds of life cover are, and how they vary.


What are the different types of life insurance?

Life insurance is typically designed to pay out a lump sum in the event of your death, although some types of life cover can pay a monthly income instead. Life cover can provide valuable peace of mind that your loved ones will be able to pay off the mortgage and other outgoings if you are no longer around.

Although life cover might not be a priority if you don’t have dependants, you should think about how you would cope financially if you were unable to work due to a serious illness or injury. Critical illness insurance and income protection cover can both provide you with financial security if you aren’t able to work due to ill health.


Life insurance

Life insurance will provide you with a sum of money if you die during the term of the policy. This money will be tax-free, and your dependants or the person you choose to leave the money to will be able to spend it any way they want.

Although your employer may provide you with death-in-service benefit if you die, bear in mind this cover is often limited, and it will only apply
while you are in that job.

Life cover is not only important if you’re the breadwinner. If you are responsible for childcare, for example, you need to think about how your partner would cover the cost of this if you died.

When buying life cover, you choose the length of time you want the policy to last at the outset. Some people choose a term which is equivalent to the length of their mortgage, or may decide to opt for a longer or shorter term to fit with what suits you.

It is possible to choose cover which lasts for your whole life if you want, known as whole-of-life cover, but premiums for this type of policy are usually the most expensive, as you are guaranteed a pay-out.

You can choose either a level (fixed) pay out on death, or you can choose decreasing life cover. Decreasing life cover is often taken out alongside a repayment mortgage, so that the amount of cover you have is equivalent to the amount you owe on your mortgage. It is usually cheaper than level cover, as your cover reduces over time.

Find out more about life insurance.


Critical illness cover

Critical illness cover will provide you with a tax-free lump sum if you are diagnosed with a critical illness specified on the policy.Having this type of cover means that if you are diagnosed with a serious illness, you’ll have funds available to fall back on so that you can concentrate on getting better. The money from the policy can be used for whatever you want, but most often it’s used to repay all or part of your mortgage, pay for private treatment or make adjustments to your home.

Policies usually cover a wide range of conditions, typically more than 40 in total, including heart attack, multiple sclerosis, cancer, and stroke. You won’t usually be able to cover any pre-existing medical conditions you have.

Critical illness cover is often purchased alongside life insurance, but you can take out standalone cover if you want to. As with life cover, you can choose a fixed or level pay out, or you can opt for your cover to decrease over time.

Policies can vary widely in terms of exactly what they cover and how much they cost, so it’s important to compare a wide range of different policies before buying.

Find out more about critcal illness cover.


Income protection

Income protection will pay you a monthly income in the event you’re unable to work due to accident or illness. You can usually cover between 50% and 60%of your income, and income received from the policy will be tax-free.

Policies will start paying out after a set period of time. You can decide how long you want this period to be when you buy cover. In the event of a claim, income protection will pay out until you are able to return to work, or up to retirement age, or the end of the policy term.

Find out more about income protection.


Family income benefit

Family income benefit is a type of life cover which pays a tax-free income rather than a lump sum in the event of your death. This income is paid until the policy term finishes.

Family life insurance often appeals to people who want their loved ones to have a regular income rather than a lump sum when they die. You can choose how long you want the policy to last for. For example, some people choose for the income to be paid until their mortgage term finishes, while others might choose for it to be paid until their children are old enough to be financially independent.

The cover can be linked to inflation, or the rising cost of living, if you want, so that the value of the monthly income paid out maintains its purchasing power.

Find out more about family income benefit
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