The life insurance need to knows

There are many different types of life insurance: some protect a mortgage and some protect all your dependants, while others provide a way to mitigate inheritance tax. Yet here we're focusing solely on life insurance taken out to provide money for your family if you or your partner were to die. This is something every parent, partner, or person with any other type of dependant needs to consider. 

The key product for doing this is called 'level term' life insurance or assurance. You insure something that MAY happen, while you assure something that WILL happen. Death is of course assured, but as the question is "will you die within a set time?" many call it insurance, and here's what you need to know.

Level term life insurance pays out a set amount if you die within a fixed term
This is the simplest type of life insurance and the name actually tells you all you need to know...

• Level: The payout you get doesn't vary. It's always at a set amount regardless of when you die during the term, eg, £200,000
• Term: You only get a payout if you die within a fixed term, eg, 18 years

So all in all the cover guarantees a lump sum payout upon death to your dependants within a fixed time, for example, £200,000 if you die within the next 18 years. Obviously, the more cover you get and the longer the term you want, the more it costs. 

It's also worth noting that as the policy only pays out on death – there's usually little dispute over whether someone is dead or not – and it pays a fixed amount, then providing the company is reputable...

It's just a case of the cheaper the policy, the better.

Don't confuse it with other types of life insurance

This is just one type of life insurance, there are others that do different jobs including:

• Mortgage decreasing term insurance: This pays out to cover your mortgage if you die within a set term. As mortgage debt decreases over time, the amount it pays also decreases (it's often called 'decreasing term assurance' because of this).

• It's cheaper than level term life assurance as the insurer usually has to pay a lot less. See our Mortgage Life Insurance guide for how to get it. However, if you want to leave a lump sum for your dependants to cover other debts and ongoing spending, a level term life insurance policy, while more expensive, is likely to be a better option.

• Whole of life insurance: These are often (but not always) investment-linked life insurance policies mainly used to mitigate inheritance tax. In other words, the payout amount should cover the inheritance tax bill on death, and the policy runs out when you die, instead of after a fixed time.

• Life insurance investment: These are effectively investments operated through life insurers. While there is a life insurance element they're often things like endowments or with-profits policies and are used far more often in the 'investment' zone rather than for protection if someone dies.