Life Insurance provides valuable financial protection in the event of your death, it provides for a payment of a sum of money upon the death of the insured. The main reason for insuring your life is to replace an income you are generating that someone else relies on. It can also pay for one-time costs that are connected with death such as funeral and burial costs, administration costs and any outstanding debts. It can also be used to create an inheritance for your heirs or even to make a significant charitable contribution. However, the long-term nature of life insurance means it can also be used as a means of saving or investment. Some policies protect, some help you to save and some do both.

There are three main types of life insurance: Term Insurance, Whole Life Insurance and Endowment Insurance.

Term Insurance (sometimes referred to as Temporary Insurance) is the simplest form of life insurance and also the cheapest form. It can offer high life insurance for a low premium, making it ideal for those with a limited income. Term Insurance gives you financial protection if you die within a specific period known as ‘the term’. This period can be anything from one to thirty years, although it is possible to arrange policies that can cover you for periods as short as one month. The downside to Term Insurance is that it only pays if death occurs during the term of the policy – if you are alive at the end of the term no payment is made. Also there is no surrender value which means if you stop paying the premiums the cover ceases and you will receive no refund of any premiums paid.

There are two basic forms of Term Life Insurance: Level Term and Decreasing Term (although some insurance companies may offer additional options). Level Term basically means that the amount payable upon death stays the same throughout the duration of the policy. The amount you agree when purchasing your policy is the amount that will be paid out in the event of your death. Decreasing Term means that the amount payable upon death drops (usually in one-year increments) over the course of the policy’s term.

Term Insurance is ideal for those that need life insurance for a specific period of time or for those that need a large amount of life insurance but have a limited budget.

Whole Life Insurance (also known as Permanent Insurance) is not limited to a specific period like Term Insurance. Whole Life insurance pays the sum insured whenever your death occurs – even if you live to be 100! The policy does not ‘expire’ (mature) until the event of your death. Premiums are usually more expensive than that of Term policies because in the case of Whole Life insurance it is certain that the insurance company will eventually pay the sum insured.

There are three main types of Whole Life insurance: Traditional Whole Life, Universal Life and Variable Life. With Traditional Whole Life the premiums and amount payable upon your death are designed to stay the same throughout the life of the policy. This means your premiums are arranged when you purchase your policy and the amount does not change. Likewise the amount payable upon your death is the same amount as agreed when you purchased the policy. Whole Life policies stretch the cost of insurance over a longer period of time in order to level out the otherwise increasing cost of insurance. The downside to this type of policy is that the inflexibility of premium payments may become a burden if your expenses increase or if you lose your job.

Universal Life offers more flexibility that Traditional Whole Life as after your initial payment you can reduce or increase the amount payable upon death and also pay premiums any time in almost any amount as long as it is within the policy’s required minimum and maximum.

Variable Life Insurance does not pay a fixed sum in the event of your death. Instead the ‘death benefit’ and cash values may fluctuate with the performance of the insurance company’s portfolio of investments. The money you pay into your policy is seen as an investment itself. You choose where your premium goes among the variety of investments within the company’s portfolio. In this sense, Variable Life is sometimes seen as being a risk because, as with all investments, sometimes cash values increase but can also decrease. If your chosen investments perform well you’ll have a higher cash value and higher amount payable in the event of your death. However, if they don’t perform so well then you’ll have a lower cash value and hence the amount payable upon your death will also decrease. Luckily some policies will guarantee a minimum amount payable upon your death so you know you won’t eventually end up with nothing. There are both Universal and Traditional Whole Life versions of Variable life.

Whole Life insurance is ideal for those who require life insurance for as long as they live rather than just for a certain period of time.

The third main type of life insurance is Endowment Insurance. This type of policy is seen as both a means of protection for your family in the event of your death and also a way of saving for the future. This is mainly because you do not have to die for the policy to pay out. With Endowment Insurance you pay premiums for an agreed number of years and at the end of this time you will receive a lump sum (the amount of which may vary depending on which type of policy you take out). However should you die during this period (before the maturity date of the policy) the insurance company will pay the sum insured or the value of the policy at that time (if it is greater). In basic terms, you (or your family) will receive a lump sum whether you die or not (within the arranged period of time).

There are two main types of Endowment of Insurance, ‘with-profits’ policies and ‘unit-linked’ policies. A ‘with-profits’ policy is often seen as a pooled investment. The money you pay in is pooled with other premiums and invested by the insurance company. The investment growth achieved by these pooled premiums is paid to you as regular and final bonuses and added to you policy. The amount of these bonuses cannot be guaranteed but it is likely that they will bring you a good investment return over the years of the policy with a minimum of risk. A ‘unit-linked’ policy is similar to Variable Life, the insurance company invests your premiums in specific funds chosen by you and the amount payable upon your death depends on the value of those investments at the time your policy matures. Hence if they do well you receive a higher sum of money than you would if they did not so well. There is no guarantee of the value of the sum to be paid except in the event of your death. Hence this type of policy is often seen as more of a risk than a ‘with-profits’ policy, however it also has the potential to pay out a greater amount.

These are the main types of life insurance policies you will encounter although most insurance companies will offer additional policies to those mentioned above, for example Critical Illness cover which provides cover against the risk of you having a serious illness, and will pay out if you develop one of the illnesses listed in the policy. When choosing the right type of policy for you it is handy to bear in mind some questions such as what you want to be done with the sum paid out. Do you want to use it as a means of savings that will pay you a lump sum in say 10 or 20 years? Or do you want to use it as a means of financial protection for your family after you’ve gone? Perhaps you don’t have any dependants and instead would like a significant sum of money to be paid to your favourite charity? Of course life insurance isn’t something that everybody needs but it is surely something to be considered if you have loved ones relying on you financially, or have a mortgag. One thing to bear in mind is that life insurance is considerable less expensive to purchase while you are young.

As with all forms of insurance, make sure you understand exactly what you are covered for and what you are getting for you money before you purchase the policy. But should you change your mind, most insurance companies offer a ‘cooling down’ period (usually at least 14 days) in which you can cancel your policy.