Term life insurance
Term insurance offers cover for a specific period of time – the 'term'. This is generally appropriate if you only need your insurance to protect your earnings for a fixed period of time, most commonly for the duration of your mortgage or until your children are old enough to be financially independent.
The size of your premiums depends on your age when you take out the policy, your state of health at the time, and the level of cover you want.
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Another factor in the cost of cover is what happens to the level of protection over time: decreasing-term insurance, for example, pays out less towards the end of the policy than at the start. This is to reflect the fact that your family’s needs may be decrease as time passes, for example as the mortgage debt is paid off (this kind of policy is often known as mortgage life insurance) or as the period for which your children are likely to be financially dependent on you gets shorter.
Level-term insurance ensures that payouts would be the same whenever the policyholder died, while increasing-term insurance means that payouts are better placed to keep pace with inflation.
If you want your policy to pay out the same or a greater amount over time, your premiums will be higher.
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This type of policy remains in force until you die instead of for a specific term. Whole-of-life cover is more commonly aimed at older people rather than those with new mortgages or young families. It is typically sold on the basis that it will help the deceased’s relatives cover the likes of funeral expenses or inheritance tax bills, although it can also help to bolster the pension incomes of widows or widowers.
Some whole-of-life cover usually requires premiums to be paid only until a certain age, say 65. At this point, the policy remains in force but no more premiums are due. Other policies use premiums to make investments that are expected to grow to cover the sum insured: but in some cases, if these investments do not do well, higher premiums may be charged.
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Critical illness cover
This type of insurance offers a tax-free payout if you are incapacitated by serious health problems, for example cancer or heart disease, and have to give up work either temporarily or for good.
Premiums will depend on your age, state of health and amount of insurance required. Pre-existing medical conditions are unlikely to be covered, and not all illnesses will qualify for claims: when taking out a critical illness policy, it is vital to check the small print and to be completely honest in the application process.