If you want affordable life insurance that is good value for money, then a term life insurance policy is a good way to go. It is cheap because it only covers you for a specified amount of time, and under most policies your premium remains fixed, not increasing if you experience ill health. As most people know they’ll only need cover for a certain period of time, term life insurance can be both suitable and cost-effective. Read on to find out whether term life insurance could be the right policy for you.
What is term life insurance?
Put simply, life insurance is designed to pay out a sum of money after you’ve passed away. Term life insurance is one of the most common types of cover. Under this policy, the payout is only made if you die within a fixed period of time. If you die after this pre-agreed time frame (which is called a term) then you won’t receive a payout. Because of this, term life policies normally have lower premiums than policies which cover you for your whole life.
How does term life insurance work?
Level term policies are fairly straightforward. You set both the amount of cover (e.g. £5,000) and the length of the policy term (e.g. 20 years).
If you die at any point in that 20-year period, then your family would receive a payout of £100,000. The payout is the same whether you die within a year of buying the policy, or if you died a year before the policy expired. If you live beyond the policy term, then you’ll have to take out a new policy.
One benefit of term life insurance is that your premium will never increase, even if your health declines unexpectedly. This means that your life insurance costs remain predictable, and you can rest assured your family will receive your payout if you die within the term.
What types of term life insurance are there?
Term life insurance comes in different forms, where the payout can increase, decrease or stay the same.
Level term: this is best suited to most people. With level term life insurance, your premium and payout both stay the same throughout the policy’s term.
Increasing term: this increases the payout throughout the term. Your premiums may or may not rise during such a policy, but there are no health checks so ill health won’t cause your premiums to rise. This is suitable for those who are worried about rising living costs. Increasing term life insurance is also good if you’re planning a large family, so you’re certain that your living costs will increase significantly.
Decreasing term: your premium stays the same, but the payout decreases throughout the policy’s term. This is a cheaper option and is good if you decide you need less cover as time goes on. After all, over time your mortgage debt will decrease as you pay it off. Premiums tend to be much lower with decreasing term life insurance because it’s less risky for the insurer - if they have to pay out, it will likely be a reduced amount.
Renewable term insurance: this is where you take out a short-term policy with an option to renew at the end of this period. Your insurer can’t use any health issues you’ve developed in that time to raise your premium. But your renewal quote might increase to reflect your age.
Convertible term insurance: subject to terms and conditions, a convertible term policy can be converted into an endowment policy. An endowment policy offers a cash payout when it matures. Just like renewable term insurance, no new health check can be made in the course of the policy. Under most policies like this, you can convert at any point during the term of insurance.
Renewable and convertible hybrid: some policies offer you two options - either renewing for another term or converting to a permanent policy. Most convertible term policies offer this, with insurance being up for review annually. As with other term life insurance policies, additional health factors won’t be considered, but your age probably will be.
It’s worth remembering that the more options and flexibility you build into your policy, the higher the premium you’re likely to be quoted by an insurer.
What if I don’t want my payout to be a lump sum?
If you don’t want your payout to be given to your family in a single payment, you could look into a family income benefit (FIB) policy. This type of policy pays out an income to your family after you die. The policy pays out monthly until the term ends. For instance, if you die 10 years into a 20-year policy, then an income would be paid out for the remaining 10 years.
A FIB policy can offer financial stability to your family, and help them pay their monthly bills until, for example, your children leave home.
How is term life insurance different from mortgage life insurance?
If you want to specifically cover your mortgage (as this is likely to be your largest outstanding debt) then a decreasing term life insurance policy might be of interest to you. This is also known as mortgage life insurance. It’s commonly used to cover a person’s outstanding balance of a mortgage loan.
The overall debt decreases over time, as you make more repayments to your mortgage. Accordingly, the level of mortgage life insurance cover that you need decreases. So, the amount that you’re covered for decreases over the term of your policy to match your outstanding debt.
For example, if you died two years after buying the policy, the payout would be higher than if you died 20 years later.
What should I keep in mind when taking out term life insurance?
Because most term life insurance policies don’t change their payout over time, you’ve got to choose your level of cover very carefully before buying. Remember that your circumstances can easily change. For example, if you’ve currently got children depending on you, are they going to reach adulthood and move out fairly early on in the term? It’s worth looking at your situation every now and then, to make sure you aren’t overpaying on your policy, or under-insuring yourself.
How can I apply for term life insurance?
You need to compare life insurance
quotes from providers that offer term life insurance policies. You can get quotes online, but some can also give you quotes over the phone or in branch. To get a quote, you’ll need to give an insurer the following information:
- Your personal details, such as your name, address, date of birth and your medical history. You’ll also have to tell them whether you smoke or have ever smoked.
- How long you’d like the policy to last. You can choose between one year and forty years, depending on the insurer and your age.
- How much cover you want. You can choose up to a few million pounds, but this varies between insurers. The higher the payout you want, the higher your monthly premiums will be.