Term Life Insurance explained
When you purchase life insurance you need to think carefully about how long you would like the cover to last. You may assume that a 'life' insurance policy will cover you until whenever the worst happens, but this is not always the case – or necessarily the best option
Life insurance aims to protect your dependants in the event of your death by making sure they are provided for financially. Some people take out a policy when they get married or have children, while others get cover when they buy a house. Your family's dependence on your income will change over time, however –- for example, children may need more support while they are living at home and in full-time education than they will once they are working. So, in some instances, life cover may only be necessary for a specific period, such as for the duration of your mortgage term (usually 25 years), rather than throughout your whole life. In this case, Term life insurance is worth considering instead of the more expensive Whole-of-life cover.
What is Term insurance?
This type of policy lasts for a fixed period, agreed according to your needs – in contrast to Whole-of-life cover which is in place until you die. There are several types of Term insurance, however, each one tailored towards different needs:
- Level term insurance: This keeps the potential payout the same regardless of when a claim might be made during the policy term.
- Decreasing term insurance: Sometimes referred to as 'mortgage life insurance ', with this cover the potential payout falls year on year. It can be suitable if you only need life insurance to cover mortgage repayments, as the total amount owed shrinks each year. It is generally less expensive than Level term insurance or other types that grow over time.
- Increasing term insurance: This can be suitable if you think your dependants' financial needs are likely to increase rather than decrease over time, with the potential payout increasing over time to reflect the rising cost of living. You can decide on a percentage it increases each year, or link it to an established inflation measure such as the Retail Prices Index (RPI) or Consumer Prices Index (CPI). Premiums tend to be higher than those of Level term or Decreasing term insurance.
- Renewable term insurance: Cover is provided for a fixed period, but on the expiry date there is an option to continue without undergoing further health checks. Premiums are likely to be based on your age at the renewal stage, but do not reflect any health issues you have experienced since the original policy was taken out.
Help reduce your family’s tax bill
Consider writing your life insurance policy in trust, which means the cover falls outside of your estate for inheritance tax purposes. This can mean your dependants face a lower tax charge in the event of your death – and since inheritance tax is charged at 40% on bequeathed assets above the £325,000 threshold, depending on your other assets up to 40% of the life insurance payment could get swallowed up by tax if the policy is not written in trust.