Get the right life insurance for you

Life insurance policies come in all shapes and sizes. Here's my guide to your options, and what they mean for the cash in your pocket!

When I talk about life insurance what I really mean is 'term assurance'. Term assurance is a simple plan which normally pays out a cash lump sum should the worst happen to you during the policy term.

If you survive beyond the term, the cover ends, and you'll stop paying premiums at this point too.

But insurers have tweaked the basic policy quite a bit to give you a whole range of extra options. Some of these plans you might already know about - some you might not.

So, let's find out which one is right for you:

1. Level term assurance

This plan pays out a cash lump sum to your family (or any other beneficiary you choose) if a claim is made during the term.

If you want the amount of cover to stay the same for the life of the policy, then level term assurance is a good choice for you.

Some insurers offer a level plan with what's known as 'guaranteed insurability options' or GIOs. GIOs give you the right to increase the cover at key stages in your life such as getting married, having a baby, changing careers, or moving to a larger home.

Crucially, your protection can be increased, but the insurer won't underwrite you again. Underwriting is a process insurers use to set your premiums based on your age, gender, health, medical history and so on.

This means you won't lose out if you need extra life cover, but your health has deteriorated in the meantime. The premiums you pay for the additional protection will be based on your age at that time.

To find out more, read How to keep the costs down for extra life cover

2. Increasing term assurance

This plan provides an increasing amount of cover to combat the effects of inflation (rising prices) over time. If you want to make sure the cash lump sum given to your family has the same purchasing power no matter when a claim is made, then this type of plan is worth thinking about.

Increasing term assurance can be index-linked, which means the amount of protection rises in line with the retail prices index (RPI). Alternatively, the cover could be stepped up by a fixed percentage each year. However, this option may not keep pace if the inflation rate is higher than the fixed percentage increase you choose.

Expect the premiums to be higher than a level plan to cover the cost of inflation-proofing.

3. Renewable term assurance

If you need more flexibility, you could consider renewable term assurance. This works like a series of shorter term plans - usually five years - which can be run back to back. When the first five-year policy is due to end, you'll be given the option to renew it if you need to.

Each renewal is guaranteed because you won't need to provide any further medical evidence at that time. So, even if your health has deteriorated, you'll still be accepted for a new policy.

But the premiums increase at each renewal point in line with your age, which means the policy will be more expensive than a basic level policy.

4. Convertible term assurance

Quite simply, this plan gives you the option to convert your policy into a 'whole-of-life' plan (if you need cover for the rest of your life) or an endowment policy without any further underwriting needed. Again, the new policy will be based on your age at the time of the conversion.

The premiums you pay will be higher to pay for the cost of the conversion option.

5. Decreasing term assurance

Decreasing term assurance provides an amount of cover which reduces gradually over the term.

If you have a reducing debt - such as a repayment mortgage - this policy is particularly suitable for you. The policy will pay off your outstanding mortgage should you die within the term.

(Those of you who need cover for an interest-only mortgage will need to go for a level plan, because the mortgage debt always stays the same.)

Because the amount of cover drops over time, the premiums are cheaper than a level plan.

6. Family income benefit

Instead of paying out a lump sum, family income benefit provides a regular income during the term. Again, this is a type of decreasing term assurance where the total amount of cover reduces every year when a claim isn't made.

So, let's say you want £10,000 worth of cover every year for the next 20 years. When the policy is set up the total amount of cover is £200,000. If a claim is made in year one, your family would get £200,000 paid in 20 annual instalments of £10,000.

But if a claim is made at the beginning of year 11, your family would only receive £100,000 in total, paid in ten annual instalments of £10,000.

7. Index-linked family income benefit

Of course, an income of £10,000 in year one, is not worth the same in real terms as an income of £10,000 in year 20. If you want to protect your family's income from the effects of inflation then an index-linked family income benefit policy is the right choice for you.

Income can be linked to the RPI, or it can automatically increase by a set percentage each year. As with all inflation-proofed plans, the premiums will be more expensive to pay for the cost of a rising income.

So, that's my rundown of all the main term assurance plans. But, whichever one you choose, make sure you shop around for quotes before you apply. If you need a standard level or decreasing term assurance policy, you can compare costs using the lovemoney.com life insurance search engine.