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life insurance policy types
Life Insurance Policy Types

Life insurance policies are one of the few things that you cannot afford to ignore in life. At some point, as we all get older, we realize that we need to think about what would happen to our families financially if we were to die. So, for many of us this means that we will take out one of the types of life insurance that are available to us.

Knowing that you need to take out one of the available life insurance policy types and knowing which one to actually pick are actually two very different things! There are all kinds of insurance companies out there offering all kinds of different life insurance policies, so it can be hard to know where to start. Let’s take a look at the basic types of life insurance to make things a little simpler.

Which life insurance policy should you choose?

In very basic terms, there are two types of life insurance policies.  You can pick a policy that will only pay out IF you die within a specific time frame (term insurance) or a policy that will pay out WHEN you die (whole of life insurance).

  • Term Insurance: Term insurance gets its name because it only lasts for a specific period of time (known as the ‘term’). This kind of insurance policy will only pay out if the person who is insured dies while the policy is still valid. So, as an example, if you insure your life for 25 years and die in the 20th year of your policy, then the insurer will make a payment to your next of kin. If you die 26 years after taking out the policy then no payment will be made as the policy will have finished the year before.

The big advantage to taking out term insurance is cost. This type of life insurance policy tends to be cheaper as you only take the policy out for a specific number of years. The policy will only pay out if you die during this time which means that there is a fair chance that the insurer will not have to pay out as you may well live longer than the policy. The disadvantage is that you will not have coverage for life.

  • Whole of life insurance: As the name suggests, these life insurance policy types give you coverage for the whole of your life. Unlike term life insurance policies, whole of life insurance will last until you die so you will pay for it for life. Some options in these types of life insurance can also be set out on an investment basis, so that they pay out a sum of money on a certain milestone date as well/instead of life coverage.

The advantage to a whole of life policy is that you know that you will have coverage for all of your life. So, you won’t need to worry about what will happen if you die as a payment is guaranteed. The disadvantage to this kind of policy is cost. The insurer knows that it will have to make a payment at some stage (as we all die eventually) so it charges higher premiums to cover this.

In order to pick the right life insurance policy types you need to think about how much you can afford to pay for various life insurance policies and for how long you will need coverage. Many people, for example, opt for term insurance types of life insurance to simply give them coverage while they are paying off a mortgage or until their family has grown up.

Others prefer to take on life insurance policy types that will give their families a financial pay-off no matter when they die.  In this instance, they treat their life insurance policies as an investment opportunity. But, no matter what types of life insurance you ultimately choose, make sure to get it early so that you and your family have the best financial protection.

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