Types of life insurance in the UK

Life insurance in the UK can be extremely diverse. Insurance companies compete with each other to create products with different durations, specific coverage and different payment methods. Customers sometimes confuse different types of insurance or misinterpret the terms and conditions presented in offers. To help you make your decision, we have decided to prepare this post – treat it as a comprehensive guide to help you focus on choosing a specific product.

What are the differences between the various types of life insurance?

In order to better understand each of the product types discussed, it is first necessary to identify several factors that define them.

Purpose of insurance

Most people have a fairly clear idea of the purpose of their insurance, although they often do not make this decision consciously. Most life insurance policies are purchased to protect loved ones from the financial consequences of the insured person’s death. However, a significant proportion, as many as 32% of Brits surveyed, indicate that they also want to secure the financial future of their loved ones. One in four people decide topurchase insurance because they have a mortgage.

Duration of protection

Although most people purchase life insurance for a period of 20 to 30 years, short-term policies (up to 10 years) and policies lasting up to 4 decades are also available. The decision on the duration of the contract should be influenced by factors such as your age, the age of your children and the number of remaining mortgage instalments. It is with this variable that our customers statistically have the most problems.

Method of payment of the benefit

Most insurers pay out a lump sum when the condition specified in the contract is met (death of the insured person). However, there are companies that provide regular payments for a specified period of time. The first type of life insurance is better suited to policies aimed at increasing the value of the estate, while the second is better if you want to protect your spouse in the event of a sudden drop in income.

Number of insured persons

Purchasing two separate life insurance policies for spouses does not usually make much sense, although this is not always the case. Both single and double policies are available on the market. This is very important when planning your family’s future.

Types of life insurance

Usually, insurers divide their products into the following types:

• Term life insurance

• Whole life insurance

• Joint life insurance

• Over 50s life insurance

Now we will describe each of these types of insurance:

Term Life Insurance

The most popular type of life insurance purchased in the United Kingdom is Term Life Insurance. As the name suggests, the contract is concluded for a predetermined period of time – usually 20 to 30 years, although it can also be 10 or even 40 years, if you are of the appropriate age. Throughout the term of the contract, the insured person pays premiums and is covered by the insurance, but the benefit will only be paid if death occurs before a specified age and the insured person does not breach the general terms and conditions of the contract, for example by concealing information about theirsmoking addiction.

Types of term life insurance in the UK

• Level Term Insurance (insurance with a fixed sum) – in this case, the amount that loved ones can receive is determined when the contract is concluded and does not change during the term of the insurance. This option is often chosen by people who want to secure their family financially regardless of when they die.

• **Decreasing Term Insurance **– the amount of the benefit decreases with each year of the policy. This option is mainly aimed at people who have a gradually expiring financial obligation, such as a mortgage with capital repayment. Year after year, the amount they have to repay gets smaller, so there is no need for the coverage to remain the same. By adjusting the policy to the mortgage, you can pay insurance premiums that decrease as the outstanding capital decreases.

Let’s assume that John has a 25-year mortgage and takes out a Decreasing Term policy for the same period. If he were to die in the fifth year of coverage, the sum insured would be very high – e.g. £180,000. This would enable his family to repay the mortgage early and free themselves from the obligation. The same would happen if John died after 20 years – although the benefit would be lower, most of the capital would already have been repaid, so £50,000 would also free his family from debt.

• **Increasing Term Insurance **(insurance with an increasing sum) – the last subtype of fixed-term insurance offers an increasing benefit amount. It is mainly aimed at younger people who take out long-term insurance, and the purpose of such a policy is to keep pace with inflation. As you might expect, the premiums also increase, making this the most expensive option of the three.

Who is term life insurance for?

Consider this type of insurance if:

• You have a mortgage in the UKand want your family to be able to pay it off;

• You have a child or children of school age and want to provide for them in the event of your death;

• You have modest savings, but they will grow over time.

Term insurance will not be a good choice if:

• Your partner also plans to take out insurance;

• You want insurance that will increase your estate;

• You are over 50 years old.

Whole of Life Insurance

In addition to term insurance, whole life insurance is also a popular choice. It guarantees payment of benefits regardless of the time of death. In the standard version of such a policy, the amount of the benefit is determined in advance and does not change over the duration of the coverage. It is worth remembering that insurance premiums for Whole of Life Insurance are usually much higher than those for term insurance – the risk of paying out the benefit is essentially 100% in this case.

Whole of life insurance with profits

Some insurance companies offer whole life insurance with an investment component. These policies have different names – they are usually referred to as Whole of Life with profits/Unit-linked/Investment. In this case,** the insurance company invests part or all of the premiums paid into various investment funds.** As a result, the amount of the benefit may increase or decrease, depending on the performance of the investment. Of course, the investment is managed by a professional and is definitely profit-oriented, so you should not expect risky decisions, but rather safe growth spread over many years.

Personally, we advise our clients against purchasing such solutions. We should all invest money for the future, but our many years of experience in finance tell us that it is better to entrust your retirement savings to a fund that focuses on pensions and leave insurance to insurers. Usually, this solution is simply more cost-effective and much safer.

Who should use whole of life insurance?

Consider this life insurance policy if:

• You don’t want to think about your financial future – it’s like flying on autopilot in the world of insurance.

• You treat life insurance as a way to provide your family with an inheritance after you pass away.

Choose a different type of life insurance if:

• You are looking for an affordable policy;

• You want to invest money to give your children or grandchildren a good start in life.

Joint Life Insurance

Joint Life Insurance is a policy that covers two people – usually a couple or spouses. This solution is cheaper than two separate policies, but it should be carefully considered and tailored to the individual situation. Joint Life Insurance can be either term or whole life insurance and has two subtypes:

• Joint Life - First Death - in this case, the benefit is paid after the death of the first person, after which the policy expires. If the second person wants to continue to be covered, they must purchase another policy;

• Joint Life - Second Death - choosing this option means that the benefit will only be paid to the relatives after the death of both persons.

Which of these subtypes is better depends on the individual situation of the family. Joint Life - First Death is a better option when both spouses earn similar incomes and want to provide security for the whole family in the event of the death of one of them or, for example, are paying off a mortgage. The second type, Joint Life - Second Death, is more commonly used for estate planning.

How to use joint life insurance?

Let’s use an example that should clearly illustrate the possibilities offered by current life insurance policies:

Anna and Bogdan are married. Bogdan earns around £90,000 a year, while Anna focuses primarily on raising their children, earning just £25,000. To ensure a high level of security, the couple did not limit themselves to one policy. Instead, they have joint life - second death insurance, which will guarantee a payout of £250,000 to their children upon the death of the second spouse. To keep Anna safe, Bogdan also took out individual life insurance for £100,000. This ensures that his wife will have additional cash to organise his funeral, pay off any loans or cover medical expenses in old age.

Anna did not take out insurance on her own because her income accounts for only a small portion of her family’s income. Without her salary, Bogdan would probably still be able to support both her and their children. By using two policies, the couple has protected themselves against the worst-case scenarios and, at the same time, can save more because they do not pay unnecessary premiums.

When is it worth taking out Joint insurance?

This type of life insurance is designed for couples:

• Where both individuals require life insurance;

• Where there are beneficiaries or it is anticipated that one partner may live significantly longer than the other, for example due to age.

A joint policy is not a good choice if:

• You have no heirs;

• You have a large estate.

Over 50’s Life Insurance

The last type of life insurance is quite specific, but popular in the United Kingdom, insurance for people over 50 years of age. It is a fairly simple product, but it works slightly differently than other policies. To understand it better, it is worth knowing why it was created. Namely, with ordinary life insurance, the age and health of the person to be covered are analysed. As a result, many people, often still in middle age, would not be able to obtain insurance on favourable terms because the estimated risk would greatly inflate the amount of premiums. Therefore, a policy was created that anyone, including seniors, can qualify for.

However, this solution has its limitations –** the amount of the benefit is usually quite low** and covers only minor costs, such as funeral expenses, or provides symbolic support for loved ones. In addition, there is a risk that the insured will overpay for the policy if they live long enough or if the policy expires when the premium payment period ends. These issues therefore need to be carefully considered in order to choose the right insurance option when purchasing. It is also worth remembering that life insurance for seniors usually has a waiting period, which means that** if the insured person dies quickly, for example after two years, their family will not receive a benefit, only a refund of premiums.**

When does Over 50’s Life Insurance make sense?

Consider this type of life insurance if:

• You have no savings whatsoever – the purpose of this insurance is to cover funeral costs, not to pay out £100,000 to your children;

• You are elderly and in poor health – otherwise, you may be eligible for a standard, cheaper policy.

Do not purchase 50+ insurance if:

• You are looking for financial security for your family – in many cases, saving money in a savings account will be a more effective choice;

• You have a large amount of savings;

• You are in good health.

How do I know which life insurance policy to choose?

Although many people do not need more than one of the above-mentioned life insurance policies, purchasing several policies may be justified.** Regardless of your situation, we encourage you to contact us – we will analyse your current life insurance offer free of charge and make sure that you pay as little as possible.**