What Is Term Life Insurance And How Does It Work?
There are different types of life insurance available with term life insurance being one of them. Term life can sound confusing, but let's look at what it is and whether it's right for you
What is term life insurance?
Term life insurance is when you’re insured for a specific amount of time. You buy into a policy for an amount of time and you’re covered for the entirety of the term. Once that term expires, you will no longer be covered.
The best example of this is if you have a 25-year mortgage. You can get term life insurance for that 25-year period so that if anything happens, the mortgage would be paid. Term insurance is a great way to protect yourself against big financial commitments.
The three types of term life insurance
So we know the basic outline of term life insurance, here we look more closely into the three main types of term life insurance.
Decreasing term insurance – The mortgage example we looked at is perfect for decreasing term insurance. As time moves on, your premium and payout both decrease. The reason for this is that your mortgage will also be decreasing so you don’t need such a high level of cover.
Along with a mortgage, this is suitable for any type of large debt that is gradually being paid off. It's often the cheapest form of term insurance as the financial risk for you and the insurer will both reduce over time.
Increasing term insurance – As an exact opposite, this is where your payout is going to gradually increase over time until you either pass away or the term expires. This helps to counteract the rate of inflation as you’ll know your family will always get a good payout.
You can set this increase to be by either a set amount or by the rate of inflation, set by the retail prices index. Due to the ever-increasing payout, it does also mean that your premiums are going to gradually get higher and higher too.
Level term insurance – In this form of term life insurance, there isn't going to be any change. Your payout will remain static and so will your premium. This can give you more certainty about what is going to be happening with your policy.
You could take out a policy for £150,000 and you know that if you were to pass away at any point then your family is going to receive that specific sum. It doesn’t track inflation but you get the benefit of having cheaper premiums.
Why should I get term life insurance?
Term life insurance is perfect for anyone that wants to give their family financial protection. Life insurance is important for many people and term insurance may well be the best option for your situation.
This type of cover is perfect for families as it ensures that the rest of the family won’t have financial concerns if anyone was to pass away. Depending on your specific policy, term life insurance can often give you cheaper premiums than you’ll get with other forms of life insurance.
Term cover is especially a good idea for those who have large financial commitments such as a mortgage. It gives you that reassurance that your loved ones won’t be financially burdened. It’s also a more flexible type of cover that you can make work for you.
Choosing the length of the term
What term should you be looking for? Well, this is going to depend on your financial situation. You may wish to get a policy for 18 years that will cover your family until your children have grown up and become financially independent.
If it’s for a mortgage, then you’ll want it to at least over the full length of the mortgage, however long that may be. You may also have other milestones in mind such as the term covering you until you reach the age of retirement.
Everyone’s financial situation is unique and will have different intentions for their term life insurance. One of the greatest features of term life insurance is the flexibility it has. This means you can get the exact type of cover you want.
What happens at the end of the term?
You can see this very much like car insurance. At the end of the policy, you will no longer be covered and you can choose to renew it, if you wish. If you do then it will be a new policy and you'll have to go through the application process.
If you have a 40-year policy and die after 41 years, there will be no payout unless you obtained a new policy. It's for these reasons that you can often get very agreeable premiums on your policy as it covers you for a specific period.
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