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What is term life insurance?
Term life insurance is a type of life insurance that pays out if you die during the policy's term. Here’s what term life insurance is and how it works.
Term life insurance is an option if you want to balance your books when you die so your family isn't saddled with a large debt. Typical uses for the money include paying off a mortgage or replacing financial losses to the estate as a result of paying care home fees.
What types of term life insurance can you get?
There are two main types of term life insurance policy:
Level term: Your premium stays the same throughout the policy's term, and the payout stays the same.
Decreasing term: Your premium stays the same, but payout decreases over the policy's term.
How do term life insurance policies work?
The premiums you pay on a decreasing term insurance policy will be cheaper compared to a level term policy, but the payout you get will reduce for each year the policy runs.
If, for example, you set up a 40-year policy with £200,000 worth of cover, this is how the payout could change over time depending on the policy you choose:
| Remaining term | Level term payout | Decreasing term payout |
|---|---|---|
| 40 years | £200,000 | £200,000 |
| 30 years | £200,000 | £150,000 |
| 20 years | £200,000 | £100,000 |
| 10 years | £200,000 | £50,000 |
| 1 year | £200,000 | £5,000 |
Decreasing term life insurance policies can be taken out alongside mortgages, so the payout reduces in line with your monthly mortgage repayments.
If you do not want a lump sum
You could look for a family income benefit (FIB) policy, which pays out an income to your family when you die instead.
The policy will pay out monthly until the term ends. For example:
If you die 5 years into a 40-year policy, an income will pay out for the remaining 35 years
If you die 30 years into a 40-year policy, an income will pay out for the remaining 10 years
This can offer financial stability to your family and help them pay their monthly bills until a time when they may not need as much support, for example, when your children leave home.
If you die after the term ends on the policy, your family will not get a payout.
How do you apply?
You need to get quotes from insurers that offer term life insurance policies.
Compare quotes from several insurers to find the cheapest premiums for the cover you want. Then you can buy the policy by setting up a direct debit and the cover will start straight away. When you get a quote, you need to give the following information:
Your personal details: This includes your name, address, date of birth and medical history. You will also have to say if you smoke or have ever smoked.
How long you want the policy to last: Choose from 1 year to 40 years, depending on the insurer and your age.
How much cover you want: Choose up to several million pounds, depending on the insurer. The higher the amount, the higher your monthly premiums will be.
How much you can afford to pay each month: Depending on your requirements monthly premiums can vary from around £5 to more than £100.
Benefits and issues to consider
A claim on a term life insurance policy can only be made if you die during the term. This presents a dilemma for younger policyholders who would expect to live for a long time. However, none of us can predict the future, and the value of a policy that protects your family should you die early could offer great peace of mind.
It is also worth bearing in mind that while the policy will pay for many of the more common causes of death others may be excluded. For example:
Included: Accidental death, cancer, heart disease
May be covered (check policy terms first): Critical illness, terminal illness, suicide
Will not be covered: Pre-agreed exclusions, drug and alcohol abuse, undisclosed pre-existing health issues, reckless or dangerous activities
Alternatives to Term Life Insurance
Term life insurance may not be for everyone. If you are not sure about this option consider the alternatives, such as Whole of Life policies. With this type of policy, you pay monthly premiums for life, and your family will receive a pre-decided lump sum upon your death.
You could also consider a Joint Life policy. This could prove worthwhile if you have bought your home with a partner or have children. The policy will pay out a predetermined sum when one, but not both of you die. You can get level-term, decreasing-term or whole-of-life policies.
Additionally, you might want to consider critical illness cover or an over 50s plan. If you are not sure on which way to go, take out independent financial advice first.