Types of Insurance

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Types of Life Insurance

There are two broad types of life insurance: protection-only and investment-type. If your main need is for protection, there are two schools of thought:

• The first recommends that you choose protection-only insurance, which is called 'term insurance'. In its simplest form, it pays out a specified amount if you die within a selected period of years. If you survive, it pays out nothing. It is the cheapest way overall of buying the cover you need. The numerous variations on this basic theme are described below.

• The second recommends that you choose a whole-of-life policy that is one form of investment-type policy. As the name suggests, this provides cover for as long as you live. Since the policy must eventually pay out, it builds up an investment value that you can cash in by surrendering the policy. However, it takes many years for a surrender value to build up and, in general, whole-of-life policies are an expensive buy if your main need is protection. A variation called a 'maximum protection policy' lets you buy a high level of cover at a premium that is initially very low. You should always avoid taking out an endowment policy if your primary need is protection.

Endowment policies are investment-type life insurance, which pay out if you die within a specified period (the endowment period) and also pay out if you survive. On the face of it this may seem appealing - something to gain whether you die or not - but such policies are an expensive way of buying life cover. Endowment policies can have a role to play in your financial planning, and this, but they are not ideal for protection of your dependants.