No one likes to think about dying, but it’s important to be prepared for the possibility, particularly for people with a family to provide for. Life insurance is an important part of these preparations. There are several different types of life insurance, but all of them share important characteristics.
The basic principle of life insurance is simple: when you take out a life insurance policy, you pay a monthly sum to your insurer. In the event of your death, the insurer pays an agreed-upon amount of money to an individual named in the insurance policy, usually your spouse or next of kin.
Within this basic framework, there are three broad categories of life insurance. The first and simplest is level life cover, often simply called “level cover“. With level cover, both the monthly payment and the amount to be paid out in the event of death remain the same throughout the duration of the cover.
Decreasing life cover is a slightly more complicated form of life insurance, in which both the monthly payments and the payout in the event of death decrease over time. The chief advantage of decreasing life cover is in matching mortgage payments. Decreasing life cover can be matched to the value of a mortgage. As the amount remaining to be paid on the mortgage decreases, the sum to be paid at death decreases as well. This arrangement protects families from losing their homes on the death of the primary earner.
Joint life cover can be either level or decreasing. The unique thing about this type of insurance is that joint cover is taken out by two people, often a couple. Each partner pays a monthly premium. On the death of one partner, the other receives a lump sum and the cover comes to an end.
Although the basic types of life insurance cover are simple, the exact details of the insurance policy will vary from person to person. When choosing insurance cover, you may wish to select additional features. For instance, it’s possible to have your cover continue without payments for a period of time in case you are unable to work.
As with any insurance cover, the exact details of life cover are determined not only by your choices but by how likely the insurer thinks you are to make a claim. For example, women tend to have lower premiums than men because of their longer average life expectancy.