Types of Life Insurance
There are a large range of life insurance products on the market, both domestically and internationally. They range from the relatively simple term life products to complex, quasi-investment products. Unless your needs are very specific, you are advised to seek professional advice in selecting the appropriate product or service for your situation.
To provide an introduction to the area, we summarise below some of the attributes of two common forms of insurance - term insurance and “whole of life” - plus some of the more common options.
Term Life Insurance/Assurance
Term life insurance pays a lump sum in the event of death within a specified period of your choice (known as the 'term' of the policy). You generally pay for the policy via monthly or annual premiums throughout the term of the policy and, more unusually through a single, lump sum premium.
There is no investment aspect with this form of life insurance; hence, if no claim is made then no maturity or cash value is payable at the end of the term.
Term insurance is the simplest and cheapest form of life insurance and the period of cover may extend up to age 95; with the premium depending on a number of factors including the sum insured, the period covered, age, gender, health and occupation of the insured. Medicals will not always be required but you can expect to fill in a health questionnaire. Whether you smoke or not will usually affect the premium payable, with smokers paying more; a non smoker usually being defined as someone who has not smoked for at least 12 months. Premiums for women are generally lower as they tend to live longer than men.
There are a number of types of term insurance available, including:
- Level - a lump sum is payable on the event of death. This lump sum remains constant throughout the period of the life insurance term. This is the most common form of life insurance.
- Decreasing - a lump sum is payable on the event of death. The lump sum decreases by a fixed amount during the period of the term, decreasing to nil by the end of the insured period. This type of cover is usually used to cover mortgages or other loans where the amount owed decreases year on year.
- Single and Joint Life plans – a single life plan insures one life whilst a joint life first death plan insures two lives but only pays on the first death.
Additional options can be added to increase the level of cover, although this in turn increases the premiums.
Disability Insurance provides a benefit upon illness or injury. There are a number of different types of disability insurance, but the most common are:
- Income Protection (also known as Disability Income Insurance) provides a monthly benefit to replace lost income when someone is unable to work due to sickness or injury, and can be paid up to age 65 linked to inflation. The benefit can be up to 75% of your salary package.
- Total and Permanent Disability (TPD) – pays a lump sum when an individual becomes totally and permanently unable to perform an occupation they are suited to. There are significant differences in definitions for these types of policies, and care needs to be taken to understand these differences.
- Trauma Insurance (also known as Critical Illness Insurance) pays a lump sum provided an individual survives for a period of time (often 14 or 28 days), due to any one of a number of specifically defined illnesses. The major illnesses include: heart attack, cancer, stroke or coronary artery bypass surgery.
Whole of Life Insurance
As the name suggests, 'whole of life' cover provides life insurance cover for the whole of your life. The sum insured is paid to your dependents following your death.
Whole of life insurance is more expensive because it is certain that the life company will eventually have to pay the sum insured and there is an attaching investment value. Monthly premiums are invested by the insurer into a life fund.
There are a large number of types of whole of life insurance, and they tend to be very popular in environments where inheritance taxes exist, such as the US and UK. This is not the case in other environments such as Australia and New Zealand where the product is no longer available.
The terms and conditions attaching to policies vary considerably, so make sure you understand the scope of the cover being offered before committing yourself.