Term life insurance is a policy designed to cover the cost of living expenses when you die if, at that time, you have dependants who rely on you financially. The policy pays out at the time of your death and ensures that your family can sustain their standard of living, and pay for funeral costs etc. Term life insurance runs for a set length of time determined by yourself when you take out a policy. If you were to die outside of this timeframe you would not receive a payout. As a result, term life insurance policies are usually cheaper than those that cover you for the whole of your life.
When you take out a policy you decide how much cover you require, and how long you wish the policy to run for. You might, for example wish to take out cover to the value of £150,000 over a twenty-year period. In this case if you were to die at any point during the twenty years your dependants would receive £150,000. The amount awarded stays the same at all times throughout the length of the policy term. This is contrary to a life insurance plan designed to cover the cost of your mortgage. Known as mortgage life insurance, this type of policy covers any outstanding balance on your mortgage at the time of your death. The amount owing on a repayment mortgage decreases over time so subsequently the level of cover you require also decreases. For this reason a mortgage life insurance policy offers less cover as the years go by.
If your intention is to cover your family’s living expenses if you were no longer around to provide for them financially then level term life insurance is likely to be the most viable option. Bear in mind before taking out a policy that the amount paid out does not increase over time therefore you need to calculate exactly how much cover you need before you purchase a policy. Many insurance companies offer online calculators that will enable you to do this. Alternatively, you could seek the help of an independent financial advisor. Once you do have a policy in place it is worthwhile reassessing your circumstances once in a while to make sure that you are not over, or under-insured. Additions to your family can mean that you need more cover in place, likewise, as your children grow up and leave home you may find that you need less cover.
An alternative to level term life insurance is a family income benefit policy. This is a decreasing term life insurance policy that starts to pay out a regular income to your dependants upon your death until the policy expires. One of the advantages of this type of policy is that it is easier to work out how much cover you will need. For example, if you are currently in receipt of a monthly salary of £1800 per month then you can arrange for your family to receive the same amount, on a monthly basis, should you die. One of the disadvantages of a family income benefit policy is that if you were to die just five years into a twenty-five-year policy your family would receive £1800 per month for twenty years. However, if you were to die just five years before the policy was due to end your family would only receive payments for five years.
Also available on the market is a whole of life insurance policy. This type of policy is ongoing, and is guaranteed to pay out when you die. They can be a useful way of covering the cost of inheritance tax, but are more expensive than term life insurance policies.
When deciding whether a term life insurance policy fits your needs you should take into account a number of factors. The monthly premiums will usually stay the same throughout the term of the policy, and you can choose how long you wish the policy to run for; this usually starts at five years, increasing to thirty years. The pros and cons of a term life insurance policy are that if you die during the term of the policy your dependants will receive a payout, but if you don’t die then they will receive nothing.
In general, term life insurance is cheaper than whole of life insurance. The premiums are usually fixed so you know exactly how much you will be paying throughout the term of the policy. The price of these premiums, however, depends upon a number of factors including your age, health, and general lifestyle.
Mostly, term life insurance policies are not suitable for people over the age of sixty-five. However, some companies do offer you the option of converting your policy to a whole of life policy without having to undergo a medical examination. This enables you to keep your coverage even after your term life policy has expired, although in many cases there is a cut-off age when insurers will no longer allow you to convert your term life policy.
If you are in any doubt about the suitability of a term life insurance policy an independent financial advisor, or insurance broker, can always offer advice and help you to find a product that is right for both you and your family.