How to choose the right life insurance policy for you

Assessing your own personal circumstances is the best way to narrow down the life insurance policies that meet your requirements. We'll look at the different policies available and explain each one.

What is a life insurance policy, and how does it work?

A life insurance policy provides your family or dependents with a cash sum or regular payments when you die. It's a key consideration if you want cover for any financial commitments and offer protection for your family.

Think of all the financial responsibilities in your life and potential future expenses, these could be anything from:

• Mortgages

• Debts

• Living costs

• Funeral fees

• Help for your family's future costs (such as university fees for your children, for example)

Crucially, you'll need to keep up your premium payments if you want your policy to remain active. It's also important to consider these payments when you're weighing up life insurance policies and their costs. If you stop paying your premium, some insurers will cancel your policy, and you won't receive any potential payout. Others may offer a grace period to continue making payments to reinstate your policy.

There is a key difference between sum assured and sum insured policies:

• Sum assured is the guaranteed, pre-agreed amount your beneficiaries will receive when you die.

• Sum insured is the total amount of cover you're afforded in your policy, though not all of it may be guaranteed.

You'll also need to be aware that different life insurance policies vary in their length. Some are fixed term and will not pay out beyond the expiration of the policy. Others last for a lifetime, meaning it lasts until you die, at which point the guaranteed sum is paid to your beneficiaries.

There are similar insurance policies, such as income protection insurance and critical illness cover:

• Income protection insurance is designed to help financially if you can't work because of illness or injury until you return to work, retire, or the policy expires.

• Critical illness cover can be bought with a life insurance policy for an additional cost. It'll provide a lump sum if you're diagnosed with a serious illness that's covered by your policy.

The different types of life insurance policies

As we mentioned, there's more to life insurance products than a one-size-fits-all policy. There are two common types of life insurance policies: term life insurance and whole-of-life insurance. Beyond this, you can find a host of specialised policies based on a range of specific requirements.

Term life insurance

Term life insurance offers cover for a set period of time. There are three distinct types of term life insurance: level, decreasing and increasing term policies. As the names would suggest, the cover you get with these types of cover can fluctuate over the course of the policy term.

Level-term life insurance can offer a fixed pay out at any time during or at the expiration of a policy. This amount does not change as the policy progresses and is useful for those that are loking for a guaranteed payout.

Decreasing term life insurance reduces the amount of cover available as the policy progresses. It can be a cheaper option and is best for those looking to pay off debts that reduce over time, like a mortgage. However, as you near the end of the plan, this type of policy may not provide you with sufficient cover to financially protect your loved ones' living costs.

Increasing term life insurance policy payouts rise as the policy progresses, but so do your premium payments. This type of policy will keep its real value over time, with the cover amount rising each year at a fixed rate or in-line with inflation.

Whole-of-life insurance

Unlike term life insurance, whole-of-life insurance can offer a guaranteed payout if the claim is valid and ultimately doesn't have an expiry. This type of cover is typically more expensive than term life insurance but can be a good option for those wanting to cover funeral costs or inheritance tax.

Over 50s life insurance

Over 50s life insurance is designed to offer cover to help pay for funeral costs, any outstanding debts or as a gift. The price you pay and the pay out your beneficiaries receive is usually fixed. However, depending on your risk, the premiums you pay may exceed the claim payout and the claim amount is typically lower than other types of life insurance.

Here you can see a comparison of the different types of life insurance policies and what they generally offer:

How to choose the best life insurance policy for you

Each type of life insurance has its own set of advantages, so the 'best' policy for you should be one that meets your specific needs.

To help find the policy that's right for you, consider the following steps:

• Calculate the cover you need: You'll need to accurately estimate the amount of cover you need (the sum assured). You should take into account any major financial commitments such as a mortgage, any outstanding debts, and future expenses such as school fees or funeral costs, for example.

• Factor in your personal circumstances: During a life insurance application, you're generally asked a number of questions relating to your health and lifestyle. Your smoking status, for example, can affect your premiums, so you should always answer questions truthfully. If you don't, your life insurance policy could be invalidated, and any future claims may be rejected.

• Decide on the policy term: Term life insurance policies only offer cover for a fixed period of time, where as whole-of-life insurance has no expiration. The policy you decide on should align with your long-term financial commitments so your cover runs alongside the remaining duration.

• Consider any add-ons: Many life insurance policies offer a range of extra benefits available for an additional cost. Critical illness cover and waiver of premium are two such examples of optional life insurance extras. Critical illness cover can offer an early payout for critical illness diagnoses. Waiver of premium ensures that your life insurance policy is protected, even if you can't pay your premiums due to illness or injury.

By factoring in these points, you can refine the list of life insurance policies that meet your criteria. The exact benefits and details of each policy can vary between providers, so you should always check before buying.

When should you get life insurance?

Generally, life insurance premiums tend to be cheaper when you're young and healthier. So, if you're asking yourself 'When should I get life insurance?', it's always worth considering a policy early for affordability purposes.

It's fairly common for major life events to prompt a conversation around life insurance, whether you're getting married, having children, or buying a home. As you get older, you're more likely to have larger financial commitments. So, it's important to ask yourself if you'd like to provide a financial safety net for your family should the worst happen.

Over time, your personal circumstances change, so it's wise to review your life insurance policy following key life events. You might have had children since buying a policy, or paid off the remainder of a mortgage. You may also gain some form of insurance through your employer. Whatever the case, it's always important to review your life insurance policy over time to ensure it still meets your needs.

Do you need life insurance?

When asking whether you should get life insurance, you should think about your own situation.

It's not mandatory to have a life insurance policy in place, but you might benefit from one if:

• You have a partner who you share a mortgage with.

• You have financial dependents, such as children.

• You have debts that may become the responsibility of family members after you die.

• You want to insure a financial gift is left behind, or money is available to help cover funeral costs.

There's a common misconception that you need a life insurance policy in place when applying for a mortgage. However, you're not legally obligated to have life insurance in place. It's typically recommended that you consider life insurance when buying a home, though. That's because it can help financially support your family with mortgage payments should the worst happen to you.

There are some circumstances where you might decide that a life insurance policy isn't right for you, such as if:

• You're single and have no financial dependents or any outstanding debts.

• You have a similar policy through your employer, like death in service cover.

You might decide that a death in service benefit can offer you enough cover. However, it's likely that this type of benefit only offers a multiple of your salary and might not stretch to cover what you need.

Death in service is also a benefit limited to those in specific employment. You could lose this cover if you leave the company or the role you hold.