If you’re in the market for a life insurance cover, the first thing you need to know are the three main types of policies you can choose from: Whole of Life, Level-Term, and Mortgage Life, also referred to as Decreasing Term Assurance. Each has its own terms, upsides, and downsides.
To help you make a more informed decision on which of the three is best suited for you, we explain them in detail in this post.
Whole of Life Insurance
Just as the name implies, this policy guarantees protection for as long as you live. The only catch is you must keep up with the premium payments till the end for the policy to pay out. After your passing away, the policy pays a lump sum.
This policy type may be more expensive than the others discussed here, but the benefit it can offer your family and loved ones in the unfortunate event that you pass away is well worth it. Besides, the whole of life insurance can be a great tool for dealing with an inheritance tax bill. This is because your family can use the benefits to clear the bill to permit unrestricted access to the estate.
Benefits of whole of life insurance
- You can take out the cover when you’re as young as 18 years or as old as 89 years.
- Premiums will never increase
- There are guaranteed death and terminal illness benefits
- The policy may act as a tax and final expenses planning tool.
Drawbacks of whole of life insurance
- The premiums paid higher compared to other life insurance policies
- It lacks flexibility, i.e., in case of a change in circumstances, you can’t increase or decrease your coverage, neither can you adjust the premiums.
Level Term Life Insurance
Level term policy offers protection of the insured for a fixed period, chosen by you. What this means is if the insured person passes away within the coverage period, the full sum assured will be paid. However, if they live beyond the length of the policy, the insurer issues no payout.
Comparatively, level term insurance is generally cheaper than Whole of Life policies for the same sum assured and this is what attracts a lot of people.
Furthermore, the policy can offer a level premium, meaning the insurance charge for the policy and the cover will not change throughout the duration of the policy. If you are considering taking out a policy, it is important to remember that the longer you wait, the higher the premium will be, as the risk increases with your age. Therefore, if you buy cover at the age of 18, your premium is likely to be significantly lower than the premium for a policy taken out by a 40-year-old for the same amount of cover.
Benefits of level term insurance
- You choose the amount of cover you feel is necessary
- It’s relatively cheaper compared to other policies with the same benefit amount
- You decide the term of the policy (how long you are covered for)
- The younger you are, the lower the premiums
Drawbacks of level term insurance
- The older you take the policy out, the more expensive it will be
- Very few policies end up in death claims, but still, it’s a perfect way of mitigating existing risks
Mortgage Life Insurance
Do you have a mortgage and are afraid your beneficiaries will not afford it in the event you’re gone before paying it fully? This is the insurance policy you need to take out to protect your investment and your loved ones from losing their home.
The policy is sometimes referred to as decreasing life insurance as the continued repayment of mortgage leads to a reduction of coverage. Its duration depends on the mortgage term, whereby if you have a 15-year mortgage, you’ll need to ensure your policy lasts for at least the same length. Should you pass away within the time of coverage, the cover will pay off the mortgage with a lump sum.
Benefits of mortgage life insurance
- The policy protects your family from eviction due to an unpaid mortgage
- You can use the cover to get quicker loan approvals
- It’s one of the cheapest forms of life insurance as the amount of protection reduces over the years
- It’s one of the most economical ways of protecting your mortgage
Drawbacks of mortgage life insurance
- The payout of the policy decreases whereas the premiums remain the same
- Upon your passing away, the funds go to the bank to clear the mortgage balance rather than the beneficiaries
Regardless of the type of life insurance policy you choose, you need to understand each carefully to ensure you’re getting the right deal for your situation. Level term is the simplest to understand and pays only if death occurs within the contract period. Whole of life provides coverage to the insured’s entire life provided they pay their premiums as agreed; benefits are paid to the beneficiaries. Finally, mortgage life insurance protects your home by paying off a mortgage loan should you pass away.