Life insurance is one of those purchases driven by worry rather than understanding, which is exactly how people end up with the wrong policy. The choice is simpler than the sales patter suggests, and it comes down to two main types.
Term insurance
Term cover runs for a set number of years — say, until the mortgage is paid off or the children have grown up. If you die within the term, it pays out. If you outlive it, it simply ends and pays nothing. Because it only covers a defined window, it is far cheaper, which is why it suits most families.
Whole-of-life insurance
This pays out whenever you die, with no end date, as long as you keep up the premiums. That certainty makes it considerably more expensive. It is usually bought for specific reasons, such as leaving a guaranteed sum to cover an inheritance tax bill, rather than general family protection.
Which do you need?
- Term — if your goal is to protect dependants during the years they rely on your income.
- Whole-of-life — if you specifically want a payout that is certain to happen, often for estate planning.
Getting the amount right
Cover enough to clear the mortgage and replace your income for the years your family would need it — not a random round number. And buy it young if you can: premiums rise with age and health changes, so a policy taken out early is usually cheaper for its whole life. Write the policy in trust where appropriate, so the payout reaches your family quickly and outside your estate.