Life insurance 101

Possibly the worlds least favourite investment is a life insurance policy. This is partly because this is an investment that none of us will ever get to enjoy and partly because it directly relates to our own mortality. However, the joy provided by a life insurance policy is the knowledge that your loved ones will be well looked in the vent of your death

However, with so many different types of policies available it's important to be able to choose the right one for you and your family so that everything you need to cover is covered, as well as ensuring that you are not paying for any features that you don't need.

What are the different types of life assurance?

The basic criterion of a life assurance policy is that it pays out a lump sum on the policyholder's death. Beyond that there are a bewildering number of permutations and combinations and a baffling array of jargon.

The two broad areas of life insurance are protection only and investment.

- Protection only:

Known as "term insurance", protection-only policies pay a specified amount if you die within a defined period. If you survive it pays out nothing.

Within this category there are various different types of policy including decreasing term (more widely known as mortgage protection) where the sum decreases commensurate with your mortgage commitments; level term, which pays out an assured sum that remains unchanged throughout the term; and increasing term which is linked to inflation.

- Investment One of the most popular forms of investment life assurance is the endowment policy. This is essentially a savings scheme with the added bonus of life insurance and pays out a sum of money if you die within a certain period OR pays a sum of money out at the end of that agreed period if you survive. This sector also includes "Whole Of Life" insurance, which guarantees the payment of a lump sum when the policyholder dies whenever that is (as long as you keep up with your payments).

Again, there are various types of whole life policy including non-profit (where the cash sum is fixed) and with profit (which pays a fixed cash sum plus any profits made on the investment, varying terms are available).

Your choice of life assurance is going to be dictated by several factors. First of all, look at your family circumstances - do you have a mortgage? Would your partner be able to continue to make mortgage payments in the event of your death? If not, then mortgage protection is a must.

You spouse will not only likely need to replace your income following you death in order to look after your children, but will likely also need to address perpetually mounting costs such as school fees and childcare.

Once you have established the raw framework of a policy that will provide the basics, you can begin to supplement this with a view of leaving something extra for you next of kin? Do you want to enter into a life assurance policy such as an endowment purely for investment purposes?

Whatever your requirements, once you understand what is available, you can use online resources to make your decision easier.