What different types of life insurance policies are there and what are they used for?
Term insurance
Term insurance covers you for a fixed term, for example, 20 years, after which point the policy expires. The whole of life typically covers you until death. It is possible to convert a term policy to a whole of life policy.
Term insurance is generally much cheaper, however, when the term is finished your cover stops and any premiums you paid over the term period are an irretrievable expense. A whole of life policy invests a portion of your premiums and you can accumulate accessible savings.
Term policies are typically used to ensure debt such as a mortgage or to cover a shortfall in your existing savings. A decreasing term policy is perfect for covering mortgage debt as it is cheap and can be set up so the value of the cover decreases in line with your mortgage debt.
Whole of life
A whole of life policy can be a great tax planning tool. Having a policy that will pay out enough to cover your inheritance tax bill can save your family a huge amount of stress. Many families will have to sell property to foot this bill, so having an insurance policy can prevent that from being necessary. It is also extremely easy to put an insurance policy into trust, most providers have this as an option when you take out the policy. This means the payout will fall outside your estate and not be liable for inheritance tax.
