Term or Whole Insurance…Which Policy should you choose?

Trying to translate all of the Insurance jargon when deciding on a policy can be confusing and downright brain busting. Over the next few months we will try to simplify some of these terms and translate it into a language we can all speak and understand.

Firstly lets take a look at the difference between Term and Whole Life Insurance.

TERM LIFE INSURANCE

Term life insurance is a policy which covers you for a set amount of time. When the policy reaches the end of this time period, it is then up to the policy owner to decide whether to renew or to let the coverage end. If you die within the insured time, your policy will pay out a tax-free cash lump sum to your loved ones.

An advantage of term life insurance is that it is a lot cheaper to take out than whole-of-life cover. Most term life insurance policies will run for 25 years and when you reach your 60s, and onwards, you will stop paying premiums as it is questionable as to whether you still need life insurance to protect your loved ones.

One thing you do need to be careful with if you have this kind of policy is that you don’t let your cover expire (although chances are you would be contacted by your insurer to renew),because if you were to die after this pre-agreed time-frame? you would not receive a payout.

There are two types of term life insurance available – Level Term and Decreasing Term.

Level term insurance provides cover which does not change over time, meaning that it won?t increase in line with inflation, or any other measure.? People often take out this type of life insurance when they still have a mortgage to pay off as it isn’t affected by outside financial factors. Other reasons for taking out this sort of cover is simply to be able to leave a set amount for your family when you die or you may have other debts you want paid off in the event of your death.

Decreasing term insurance allows for an amount to reduce over time, which means your premiums will be cheaper than a level term life insurance policy. Where the confusion comes in is that decreasing term insurance is quite often referred to as mortgage life insurance. As more payments are made to your mortgage, the overall level of debt decreases consequently lowering the level of cover you need. So if your main concern is to find a policy that covers your mortgage, most likely the largest of your outstanding debts, then a decreasing term policy may be the best option for you.

WHOLE LIFE INSURANCE

Whole life insurance is the more expensive option as a claim is inevitable. As the name suggests, this type of policy covers you for the whole of your life and as we are all going to die at some point, insurers know that they will definitely have to pay out. Most whole-of-life plans are connected to an investment fund. This means that the premiums and the amount covered are typically fixed for 10 years and are then regularly reviewed. Because the policy is linked to inflation if these investments are not performing well, premiums can fluctuate. It is a more risky life insurance option to choose financially but it does have the assurance of being covered for life. You need to weigh up what is more important to you – saving money on your policy but being on the ball with when your policy runs out or spending slightly more but with the knowledge that once you are covered you don’t need to think about it any more.

If you decide? that you no longer need whole life insurance then you can often cash in the policy. But beware as the the so-called ?surrender value? is often a lot less than the total premiums and this is even more so the case in the early years.

It is worth considering whether you will actually need life insurance in your later years. By that point you would have retired, so there is no salary that needs to be matched, you may no longer have a mortgage and your children are most likely independent and self supporting by then. However, some people like to provide an inheritance for their loved ones and are anxious that they should cover their own funeral costs.? Many people also choose to take out this type of insurance in order to meet a future inheritance tax bill.

Always give careful thought as to which kind of policy is likely to suit your needs and remember to compare a wide range of policies before buying cover.