What are the 3 main types of Life Insurance (UK)?
The Life Insurance Market in 2021 - UK Providers offer just three main types of Life Insurance policies.
3 types of Life Insurance – How can they be setup ?
The first type of life Insurance setup is single life insurance. As the name sounds it is setup on just 1 person’s life only. Alternatively, 2 single life policies are also known as ‘dual life insurance’. That means if you claim on 1 plan, then the other life policy remains in place.
Joint Life 1’st death
The second type of Life Insurance setup is joint life 1’st death. This plan is in 2 people’s name but will only payout upon 1 person’s death and the money is paid to the survivor when it ends eg; Maybe usually arranged to help cover a joint mortgage.
Joint Life 2’nd death
The third type of Life Insurance setup is joint life 2’nd death. This plan is also arranged in 2 people’s name but will only payout upon the 2nd person’s or last death, then it end’s. As such, it has no benefit to the 2 insured people but their family estate & dependants eg; Maybe arranged to help cover an Inheritance Tax Bill.
3 TYPES OF LIFE INSURANCE POLICIES
Having established how the three Types Life Insurance can be setup, we now look at what are the main 3 types of Life Insurance policies that are available.
- Term Life Insurance - Guaranteed
- Whole Life Insurance - Guaranteed
- Life Insurance - Reviewable
Term Life Insurance - Guaranteed
A life insurance policy that runs for a specified term eg; covers a repayment mortgage over 30 years. Uk Life Insurers usually offer a maximum term expiry of upto age 90. If you die during the term only, it then pays out the nominated lifecover value or if no claim, then it ends with no value. You can also include critical illness option with this benefit. Generally this is cheapest type of life insurance plan.
The policy is underwritten meaning Insurers ask medical health & lifestyle underwriting questions before accepting you onto cover. Once onto cover, you are typically insured immediately. It is guaranteed because usually the premium & life insurance cover is not reviewable, unless specified. This policy type can be subdivided into several areas;
The life insurance & premium stays fixed level throughout the policy term
Decreasing Term Insurance
The life insurance decreases throughout the policy term, usually to follow a mortgage, loan or Inheritance tax rates but the premium stays fixed level
Family Income Benefit Term Cover
Provides an income instead of lump sum throughout the policy term. The family life insurance effectively decreases but the premium stays fixed level
Tax Efficient Term Life Cover
Relevant Lifecover is a tax efficient business life insurance plan that enables business premiums to be offset against tax and the premium stays fixed level. Historically, there was also Pension Term Insurance that enabled you to get tax relief on your premiums. However, this plan type stopped in 12/2006.
Increasing Term Insurance
Any of the above life insurance plans whereby the cover increases by say RPI or average earnings or an agreed %. The premiums will also increase throughout the policy term to reflect this.
Option to renew a term plan without health evidence.
Reviewable Age-Costed Term
A cheaper budget style term plan where premiums are cheaper initially. However, they are still classed as guaranteed as they will increase annually as you get older, usually following a set price increase formula.
Option to convert the term plan without health evidence, usually into a whole life insurance before a set age and before the plan ends.
No Medical Term Life Insurance
This policy is often targeted online at the market via union’s like unison. It is not underwritten, meaning no health & no lifestyle questions. As such, Insurers may ask you wait upto 2 years before accepting you onto full cover. It therefore may not offer the best value against any underwritten plans https://www.unioninsurance.co.uk/products/life-cover/unison
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3 main types of Life Insurance > Term Insurance
Whole Life Insurance Guaranteed
A whole life policy is one that runs indefinitely or permanently until death. Generally these are the most expensive types of plan, as they will payout if kept going whenever you die, rather than any set term. It then pays out the life insured cover value but has no earlier cash in value. It is guaranteed because usually the premium & life insurance cover is not reviewable. May have the option to increase only if specified, for example its index-linked. This ‘permanent life insurance’ can be subdivided into several areas, with the feature being non-reviewable, fixed guaranteed, non investment style premiums;
Whole Life Insurance Plans – Underwritten Medical
The policy is underwritten, meaning Insurers ask medical health & lifestyle questions before accepting you onto cover. Once onto cover, you are typically insured immediately. Premiums are paid throughout life.
Over 50’s - No Medical Whole Life Insurance
The policy is targeted at the Over 50’s market and is not underwritten, meaning no health & no lifestyle questions. As such, Insurers may ask you wait upto 2 years before accepting you onto full cover. Premiums are paid usually upto age 90/95 then stop but lifecover lasts throughout life.
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3 main types of Life Insurance > Whole Life Insurance | Over 50’s Life Cover
Life Insurance - Reviewable
These plan types are reviewable because either being investment backed ie; investments within the life insurance plan may go up or down. Or reviewable also because of age mortality risks ie; as you get older, the insurance risk rises. Generally these can be a more expensive types of plan, as the risk means the price maybe variable to keep going at any original life insurance cover levels. It can be subdivided into several areas;
Endowments – With Profit | Unit Linked | Low Cost
- These plans aim to pay an agreed lump sum, which can be guaranteed if non profit. But usually if a traditional with profit plan, then it may include an extra terminal bonus if the fund performs well but are perhaps a riskier option because the maturity amount isn’t guaranteed. If unit linked, your premiums buy units in investment funds, and the lump sum you receive depends on how well the funds have performed through the term. Providers will review your plan cover to check if it is on target and if not, may require premium increases. It may acquire an early cash in or surrender value but this may also trigger a tax liability.
Whole of Life Cover
- As mentioned above, this policy is a type of life insurance that rather than having the policy for a set term, you hold it for the rest or whole of your life. When you die, your beneficiaries would then receive a lump sum.
- If this plan is investment backed it is therefore reviewable. It may also acquire an early cash in or surrender value but this may trigger a tax liability.
- It can be setup on 3 main types of life insurance basis.
- ‘Maximum Cover’ means the Insurers offers maximum high Life Insurance for a minimum premium but will regularly review your cover as you get older. As such, the premiums are very likely to increase at this review or the lifecover will keep reducing if not, if the original premiums remain the same.
- ‘Standard Cover’ means the Insurers offers Life Insurance with a well balanced premium, such that at review your lifecover & the premiums may stay the same.
- ‘ Minimum Cover’ means the Insurers offers a much lower Life Insurance amount with a over-balanced premium, such that at review your cover & the premiums may stay the same.
Tax Exempt Savings Plan – with Lifecover
A tax efficient way of saving regularly over a specified term for an adult or child. The value of the investment plan may go up or down. It has the added benefit of built in guaranteed lump sum lifecover, although often small if you died during the term. Some plans ask no medical health or lifestyle questions. It has been included in this section as investment backed & so technically reviewable.
Note: Of the 3 main types of Life Insurance we can advise on single life, joint 1st death & joint 2nd death. However, we only advise on non-investment style life insurance plans. We may refer you to an IFA should you prefer to choose an investment style reviewable life insurance policy.
I hope you found this article on three types of Life Insurance policies interesting & thought provoking as to your various options.
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Take care of yourself and loved ones
Martyn Spencer | Financial Adviser @ Uk Life Insurance Quotes