What is term life insurance?
With term life insurance, you have life insurance cover for a specified amount of time.
So for example with a 40-year term, should you die within the 40 years of the policy, your loved ones will receive a cash lump sum from your insurer.
It is up to you to choose what term you want the cover for. The length of the cover will affect the size of your premiums.
Who does term life insurance suit?
Having some form of life insurance in place is really important if you have people who are financially dependent on you, such as children or a partner with whom you own a property, who would be left worse off if you passed away.
Life insurance isn't just for those who are working and earning an income, though. If you are a stay-at-home parent, the family could be worse off if you passed away, as they would need to arrange childcare, for example.
With term insurance, you are only getting cover for a specific period. It, therefore, suits those who want a payout to cover large loans like a mortgage, put protection in place to help with the costs of raising a family until the children are ready to leave the family home.
What are the types of term life insurance?
Term life insurance comes in three main types.
Level term insurance
With level term insurance, the payout that your loved ones will receive remains level throughout the term of the policy. If you pass away during the term of the policy, no matter what year that may be, your loved ones will receive the same payout from your insurer.
For example, you might take out a level term policy for a £100,000 payout over a 40-year term. Whether you die in year one or year 39, your family will receive that £100,000 payout.
Increasing term insurance
With increasing term insurance, the size of the payout increases as the term of your policy continues. In other words, the later into the term that you pass away, the bigger the payout your family will receive.
The idea here is to combat inflation - as the cost of goods becomes more expensive, each pound in cover that you have needs to stretch that little bit further. But with increasing term insurance, you know that the cover your loved ones are entitled to will increase too.
You can set the cover to increase by a set amount each year or by the retail prices index (RPI) measure of inflation. But because you have the guarantee that your payout will increase over the term, your premiums will increase as your cover rises.
So, how does it work? If you have a £100,000 policy which increases by 3% annually, the next year that cover level will increase to £103,000. The graph below shows what your cover might increase to over a 25-year term with increasing term insurance.
Decreasing term insurance
As the name suggests, the payout your family would receive with decreasing term insurance gets smaller over the term of the policy.
This tends to be a popular option with those who have a large debt to pay off, such as a mortgage, as the payout falls in line with the money needed to clear the outstanding loan.
For example, if you took out a £100,000 decreasing term insurance policy over a 40-year term, and you passed away after 20 years, your loved ones would likely receive around £50,000.
Because the payout falls over time, this tends to work out as the cheapest of the three main forms of term insurance.
How does joint term life insurance work?
While you can take out a term life insurance policy as an individual, there is also the option of taking out a joint policy with your partner.
These policies work slightly differently. While two lives are covered by the policy, there is only one payout, which is generally after the first partner dies.
Because there is only going to be one payout, these policies are usually cheaper compared to each partner buying an individual policy. They aren’t just limited to couples, business partners could use them too.
There are some downsides, however. If your relationship ends, there isn’t a way of dividing the cover into separate policies. This is not an issue if each partner has their own cover.
What’s more, if both partners die at the same time, there is still only going to be a single payout.
After the first partner dies, the surviving partner is left without any life insurance cover. If you want to arrange cover, it may be more costly as you're likely to be older and potentially in less-than-perfect health.
How long should the term be?
Some insurers offering cover stretching from five years all the way up to 70 years. The appropriate term for an insurance policy will vary, but there are a few factors worth bearing in mind when working it out.
If your primary concern is ensuring your family can pay off the mortgage after you pass away, choose a term which is at least as long as your mortgage term.
Think about how long it may be until your children are financially independent. Raising a child is incredibly expensive, and you will want to have cover in place that provides for them at least until they are at an age when they can support themselves.
Your likely retirement age - and the retirement age of your partner - will also be a key consideration.
If the main aim of the policy is to provide a lump sum to cover the income you bring in, that may be less of a concern once you have hit retirement, paid off the mortgage and the children have left home. You may also want to consider a family income benefit insurance policy.
This is reliant on you and your partner saving enough for retirement. Find out more in our guide to how much will you need to retire?
What happens to my life insurance when the term ends?
The whole point of a term life insurance policy is that it covers your life for a specific term. Once that term comes to an end, you no longer have any cover in place.
So if you die a year after the policy finishes, there will be no payout of any kind to your loved ones.
Think carefully about how long you want the policy to run for and whether you would prefer to go for a whole-of-life insurance policy. As the name suggests, this guarantees a payout when you die, no matter what age that may be.
You can find out more in our guide to whole-of-life insurance explained.
What is renewable term life insurance?
Insurers take a range of health and lifestyle factors into consideration when working out what level to set your premiums. Essentially, the more likely they believe it is that you will die during the term of the policy, the higher those premiums will be.
If you're arranging a policy in your twenties, it will likely be cheaper than arranging the same cover after you’ve turned 40, all other factors being equal.
So what happens when your policy comes to an end and you want to take over more cover? As you’ll be older, and potentially have a more chequered health history, the cover will likely be much more expensive, if an insurer will even agree to cover you at all.
If you go for a renewable term policy, you can renew that cover without the need for an updated health check. So you might take out a 10-year policy, and at the end of those 10 years opt to renew your cover at the same level.
Even if you have developed some health issues, which make it more likely that you will pass away during this second term, you won’t have to pay an increased premium.
What's the difference between guaranteed and reviewable premiums?
Many insurers will offer you the choice of either reviewable or guaranteed premiums.
With a guaranteed premium, the price you pay each month for your cover is set in stone for the entire term of the policy. So if you go for a 40-year term, those monthly premiums will be exactly the same in year one as they are in year 40.
However, with reviewable premiums, the insurer has the right to periodically review your premiums and may opt to increase them. This isn’t down to your health or circumstances, but simply the insurer’s financial position and expectation of paying future claims.
Your monthly premiums will start out at a lower level if you go for a reviewable policy. However, as insurers have the right to raise the premiums as they wish, they may end up costing you more in the long run.
Get expert life insurance advice
If you're looking to buy life insurance for your family, call Which? Insurance Advisers on 0808 291 2648, Mon-Weds 9am to 7pm, Thur-Frid 9am - 6pm or fill out the form below.