The 3 main types of Life Insurance
Life insurance offers peace of mind that your loved ones will be financially supported if the unexpected happens. Choosing the right policy depends on your personal circumstances, what you want the cover to achieve, and how long you would like it to last.
Understanding the three main types of life insurance can help you make a confident, informed decision about which best fits your family’s needs and budget.
Term Life Insurance
Term life insurance is one of the most common and straightforward types of cover. It protects you for a set period, such as 10, 20 or 25 years, and pays out a lump sum if you pass away during that time.
People often choose term life insurance to cover specific financial commitments, such as a mortgage or family expenses, that will reduce or end over time. Because it only runs for a fixed term, it is usually one of the most affordable options.
There are a few variations within term life insurance:
Level term insurance: The payout amount stays the same throughout the policy term.
Decreasing term insurance: The payout reduces over time, often in line with a repayment mortgage.
Increasing term insurance: The payout grows each year, helping to protect against the effects of inflation.
Term life insurance can be a practical choice if you want to ensure your family is covered during key life stages, without committing to lifetime premiums.
Whole-of-Life Insurance
Whole-of-life insurance, sometimes called permanent life insurance, guarantees a payout whenever you die, as long as you keep paying your premiums. It does not have an end date, making it suitable for those who want lifelong protection.
Because this type of cover is guaranteed to pay out, premiums are generally higher than for term policies. However, the certainty it provides can make it a valuable part of estate planning.
Whole-of-life insurance is often used to:
Help cover funeral costs
Leave a financial gift for loved ones
Provide funds to help pay inheritance tax or other estate costs
This type of policy can offer long-term peace of mind, ensuring your family receives financial support regardless of when the claim is made.
Family Income Benefit
Family income benefit works slightly differently from traditional life insurance. Instead of a single lump-sum payment, it provides a regular, tax-free income to your family for the remainder of the policy term if you pass away.
For example, if you take out a 20-year policy and pass away after five years, your loved ones would receive regular payments for the remaining 15 years.
This type of cover can make household budgeting easier, as it replaces lost income rather than providing a large one-off amount. It is often chosen by families who rely on a steady income to meet day-to-day living costs.
Key benefits include:
Consistent monthly or annual payments that reflect your earnings
Easier financial planning for your family
Typically lower premiums compared to a lump-sum policy of the same value
Family income benefit is particularly useful for families with young children, helping to ensure that everyday costs such as childcare, education, and household bills can still be covered.
Choosing the Right Policy for You
The right life insurance depends on your priorities, age, and financial responsibilities. For some, a simple term policy may be enough to protect against specific debts or milestones. Others may prefer the lifelong certainty of a whole-of-life plan or the steady income provided by family income benefit.
It is important to review your options carefully and, if possible, speak with a professional adviser who can help you select the level and type of cover that matches your personal goals.
Final Thoughts
Life insurance is ultimately about protecting the people who matter most. By understanding the three main types of cover and how they work, you can choose a policy that provides reassurance and support when it is needed most.