There are many types of life assurance policy, all with different features and benefits. The aim of good planning is to ensure that the policy coverage matches the risk.
The main elements in a policy and its pricing or cost are:
- Term – for how long is the protection needed? This might be known (eg until a loan has been settled), or estimated (eg until the children are old enough to support themselves, say aged 18 or 21).
- Amount (‘sum assured’) – If you borrow £100,000 on an interest only mortgage, you will owe £100,000 right up until you pay the mortgage off. But if you have a repayment mortgage the amount you owe decreases every year as you slowly repay the debt. In that case you need a policy where the cover decreases as well (this will be typically cheaper than one where it doesn’t).
- Investment – Whether or not the policy includes any element of investment.
- Convertibility – Whether or not you need the ability to change the type of policy after it has commenced.
- Who – Who is to be insured? Their age, smoking/drinking habits and state of health will be important in determining the cost.
- When – When does it pay out? If only one person is being insured it will pay out on death, but if two (or more) people are being insured, does it pay out on the death of the first person or the second?
These elements will be explored in subsequent pages, as we highlight the main types of policy. (In theory you can have a policy built to fit any need, but unless you have very significant assets and complex affairs, the policies described in subsequent pages should suffice).