Three types of life insurance policies

Question: I recently read an article about personal life insurance which explained the steps to take when deciding on the amount of cover needed. However, I am still unclear about the different types of personal life insurance that are available.

Answer: In essence, there are only three types of life insurance, namely "term", "whole of life" and "endowment" which are also known as "savings" policies. In the modern world a number of variations have been introduced around these staples, which usually involve some combination of the three. Premiums for all are normally paid monthly or annually, as well as, or in addition to, one-off lump sum payments.

If you are thinking of taking a policy out then an independent financial adviser will be able to discuss in detail the most suitable policy for your specific needs. However, in brief, term insurance policies are the simplest type, designed to pay out a specified sum of money on the death of the person insured, when death occurs during a pre-determined period of time.

Premiums are normally payable throughout the designated period, although they cease on the death of the person being insured if that happens sooner than the agreed term.

The cost of these policies is relatively low as they do not include any savings element, which are normally only part of whole of life and endowment or savings policies.

Term insurance policies are often used to cover a period of time when your liabilities or outgoings are over and above those needed for the family's everyday expenditure. Typical examples here include providing cover for a mortgage on a property, and to provide extra cover while your children are growing up.

Term insurance may also be used to provide cover for education fees for the duration of the parents' life, if this is not included in other savings arrangements. Whole of life policies are designed to pay out a lump sum of money on the death of the life insured whenever that occurs, although some policies may pay out the full amount on the person reaching a certain age such as 85 or 95 years.

Premiums are usually payable either throughout your life, or at an increased premium in return for a reduced payment period such as 15 years. In the latter case, the policy remains fully in force throughout the whole period. In all premium payment variations, the policy will build up a cash value which is designed to ensure that it will remain fully in force throughout life, even during old age, when the cost of cover is normally very high.

These policies are suitable for providing permanent protection for your family, while catering for changes in your circumstances in the years ahead. In addition, should a time arrive when you feel that such a policy is no longer necessary, it is often possible to cancel it, and receive a cash sum. Endowment or savings policies are normally designed to provide a sum of money either at a specified date in the future, or on death if that occurs earlier.

These types of policies are often used in the Gulf as means of accumulating enough money to pay for children's future education costs, especially at university.

Another important purpose of endowment policies is to provide sufficient savings to ensure a comfortable retirement, wherever and whenever that may be.

Additional benefits are often an option with such policies, including life insurance, which will pay out the full amount in the event of death before the end of the savings period.

The writer is ACII Chartered Insurance Broker at Nexus Insurance Brokers, one of the leading financial advisers in the region. Opinion expressed are the author's own and do not necessarily reflect the views of Gulf News. If you have any questions, please email advice@gulfnews.com.