Types of Life Assurance

In looking at the different types of life insurance, it's helpful to remind ourselves of the basic definition.

Life insurance (or "life assurance" as it has more conventionally been known throughout the British-speaking world) is a policy that pays out a lump sum if the policy holder should die within a previously agreed period of years, and is designed to offer financial security to family and dependents on the death of the policy holder.

On the basis of such a definition, it is important to make a distinction at the outset between term life assurance and so called whole life insurance (or investment insurance). Whole life or investment insurance certainly offers the life cover included in all life insurance policies, but it also incorporates a savings or investment element which reaches maturity when the insurance comes to term. This additional, investment element makes the whole life insurance policy a rather different creature and one that, given the recently rather poor performance of that investment element, one that has attracted some degree of criticism.

With term life assurance, there is no investment element. Should the policy holder die during the term of the insurance, an agreed and guaranteed lump sum is paid to the beneficiary named in the policy. If the policyholder survives the end of the term of insurance (i.e. he is still alive), then no payment is made. If the policy holder fails to maintain payment of the insurance premiums during its term, the policy is also invalidated.

The most common lengths of insurance term are 10, 20, 25 or 30 years and are generally available on a single or joint-life (typically, husband and wife) basis, and can include optional cover for critical illness or the payment of Family Income Benefit (which we discuss elsewhere).

There are a number of different types of term life assurance:

o Level term assurance - this is life insurance at its most simple and straight forward. The insurer agrees to pay out a guaranteed lump sum in the event of the policy holder's death during the term of the insurance cover. The sum assured stays unchanged from the beginning until the expiry of the insurance. If the policy holder outlives that expiry, no lump sum is payable.
o Decreasing term life assurance - over the course of the insurance term, the guaranteed sum assured steadily decreases. This type of insurance is traditionally used to cover the declining balance of outstanding repayments on a mortgage loan. Most lenders will insist that some form of life assurance is in place to protect their loan in the event of the borrower's death.
o Renewable term assurance - this arrangement gives the policy holder the option to renew the insurance at its expiry date and continue without having to provide a medical report.
o Convertible term assurance - this is the sort of hybrid life insurance that provides an option for converting a normal level term insurance to include a whole life, investment or endowment insurance element (as we discussed above).
o Increasing term assurance - this is a convenient way to compensate for the adverse effects of inflation over the term of the insurance by providing for an increasing value in the sum assured.
o Index linked term assurance - similarly, index-linking allows both premiums and the sum assured to be increased in line with the Retail Price Index.

Whatever type of life insurance you decide best meets your requirements, do note that:

o the terms and conditions of life insurance policies can and do vary, so always check that you fully understand the cover before signing on the dotted line
o some insurers will ask that you have an examination by a doctor to establish your state of health. This could result in an increase in premiums if they believe your health to be poor; you may be declined; or, you could be accepted at normal rates.

If an insurer does ask that you have a medical examination, don't worry! Even simple things like being exceptionally tall could mean that you are asked to take one.