Additional Information

Mortgage providers will often try to sell you life cover when you apply for your mortgage, but always get quotes from other providers before buying to ensure you find the best possible deal.

Under increasing term insurance, the pay-out increases over time to keep pace with the rising cost of living. The sum assured will either increase by a fixed amount each year, typically 5%, or is pegged to the Retail Prices Index (RPI) measure of inflation.

As the amount of cover increases over time, premiums for this sort of policy are more expensive than for level or decreasing cover.

Different types of life insurance policy

There are various types of life insurance, but term insurance is the most common and the most straightforward. Term insurance pays out a cash sum if you die within the term of the plan and is not normally subject to income or capital gains tax. It is known in tax speak as a ‘qualifying policy’.

People take out term insurance primarily to provide financial security for their family. So, if you have young children you might take out level term insurance to pay out a lump sum of £100,000 on death within a 20-year term.

Each type works a little differently:

• Level term insurance: Pays out a fixed lump sum if you die during the policy term. This lump sum won’t change over time, so you and your family know exactly what will be left within the event that they need to claim
• Increasing term insurance: Designed to combat rises prices and inflation, the sum insured maintains its real value throughout the term. It is also known as ‘index-linked term life insurance’ and the sum either increases by a fixed amount each year or rises in line with the retail prices index (RPI) measure of inflation
• Decreasing term insurance: Covers a debt that gradually reduces over time, such as a repayment mortgage. It is worth considering decreasing term insurance if you have a mortgage or any big debt you would need to pay off in the event of your death. With this type, any pay-out also reduces over time, which means the premiums are understandably lower than for level term insurance or increasing term insurance
• Convertible term insurance: As its name suggests, convertible term insurance enables policyholders to convert their policy into a whole-of-life policy should they wish to. Good news is that the insurer is obliged to convert the policy regardless of any changes to the policyholder’s health
• Renewable term insurance: With renewable term insurance, policyholders have the option to renew their life cover when the policy term finishes without the need for a health review

You can also buy something called family income benefit, which makes regular payments to your dependents instead of a lump sum if you die within the policy term.