Life insurance comes in several shapes, and the cheapest one isn't always the right one. The type you pick decides who is protected, and for how long.
The main types
| Type | What it pays | Often suits |
|---|---|---|
| Level term | The same lump sum whenever you die during the term | Interest-only mortgages, general family cover |
| Decreasing term | A lump sum that falls over the term | A repayment mortgage, where the debt shrinks over time |
| Family income benefit | A regular income from the date of death to the end of the term | Families whose main worry is replacing a wage |
| Whole of life | A lump sum whenever you die, with no end date | Leaving something certain behind, or paying an inheritance tax bill |
Level term
The payout stays the same for the whole term. It is the simplest cover, and the easiest to explain to a family. It costs more than decreasing cover for the same starting amount, because the insurer's risk doesn't fall.
It fits a debt that doesn't shrink, such as an interest-only mortgage. It also works as general family cover.
Decreasing term
The sum assured falls year by year, usually in step with a repayment mortgage. It is generally the cheaper option, because the insurer pays out less the longer you live. There is a third version, increasing term, where the cover rises to keep up with inflation.
The match with the mortgage is the point. If the cover shrinks faster than your debt, there's a gap. If you want money left for the family as well as the mortgage, add a separate policy.
Family income benefit
This pays an income to your family, not a lump sum, usually from the date of death until the policy ends. A 20-year policy that you die in year 15 pays for five years.
It suits people whose worry is replacing a salary, not clearing one large debt. The cover period shortens as the term runs, which tends to match a family whose children are growing up. Check how the income is paid and whether it rises with inflation.
Whole of life
A whole of life policy pays out whenever you die, so it is certain to pay. Premiums are generally higher than for term cover, and it is less common. People use it to leave a guaranteed sum, or to pay an inheritance tax bill whenever it arises. Check whether the premiums are guaranteed or can be reviewed upwards.
Single or joint
A joint policy covers two people and usually pays out on the first death. A pair of single policies pays on each death. Joint cover is usually cheaper, but once it pays out the survivor may have no cover left. Which suits you depends on who relies on whom.
How much cover
Add up the debts that would still need paying, mainly the mortgage. Add the income your family would lose, for the years they would need it, and costs such as childcare. Then subtract what they would already have, such as savings, a partner's income and any death-in-service benefit from your employer.
Writing it in trust
A policy that isn't in trust pays into your estate. It can add to an inheritance tax bill, and your family may wait for confirmation before they receive it. Our guide to life insurance in trust in Scotland explains what to check, including the Scottish differences in trust law.
Life cover is one of three main kinds of protection. See also critical illness cover and income protection, which cover illness while you are alive.
Richard goes through what you hold and what your family would need, and arranges cover alongside the rest of your plan. Start with our Family Protection page.