What is ‘life insurance term’?

Life insurance term is a type of life insurance policy that provides coverage for a specified period of time or "term". During the term of the policy, the policyholder pays premiums to the insurance company. If the policyholder passes away during the term of the policy, the insurance company pays out a death benefit to the beneficiaries named by the policyholder. The length of the term can vary from one year to several decades, and the policyholder can typically choose the amount of coverage they want and the length of the term. At the end of the term, the policy typically expires unless it is renewed or converted to a permanent life insurance policy. Life insurance term is often a more affordable option than other types of life insurance, making it a popular choice for those seeking basic life insurance coverage.

There are two main types of life insurance term: level term and decreasing term. Both policies offer benefits and can provide financial protection for your family if you pass away during the policy term.

It's important to note that while this is a general description of widely available policies, you should ensure that any specific policy meets your individual needs and circumstances.

For instance, If the policy pays out, the funds can be used for various purposes, such as:

  • paying off your mortgage,
  • covering regular household expenses, 
  • paying for your funeral, 
  • maintaining a good standard of living for your family.

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What is level term life insurance?

Level term life insurance is a policy where you pay premiums to an insurance company for a set amount of time, known as the "term." Payments are fixed and will never change unless you change your policy. This policy could be useful for paying off an interest-only mortgage, covering other debts, or protecting loved ones.

Example of level term life insurance

 In this example, the policy is for £100,000 and the term is 20 years. If you were to die during the 20-year term and the claim is valid, the insurance company would pay out £100,000 to your beneficiaries. However, if you were to die after the 20-year term, the policy would have ended and there would be no pay-out.

What is decreasing term life insurance?

Decreasing term life insurance is similar to level term life insurance, but with one key difference: the insurance amount reduces over time, in line with a repayment mortgage. It's typically purchased to help pay off a specific debt, such as a mortgage, as the debt decreases over time. The policy is designed to ensure the mortgage is settled in the event of death, with the pay-out amount reflecting the length of time since the policy was purchased.

It's important to note that the policy may not fully pay off the mortgage, and you must adjust the insurance amount to match any changes to your mortgage. You should also ensure the policy length covers the mortgage term, and that the mortgage interest rate does not exceed the policy's interest rate. Payments remain fixed throughout the policy unless you modify your policy.

Example of decreasing life insurance

  • a policy has been taken out to cover the cost of a repayment mortgage, which has a value of £200,000.
  • After paying the mortgage for a year, the amount still owed is now £188,000.
  • as the mortgage balance reduces over time, so does the amount of insurance coverage on the policy.
  • the insurance coverage on the policy decreases in line with the mortgage balance.
  • if you were to pass away during the policy term, the insurance company would pay out a final settlement amount, which would depend on how long you had the policy.
  • The final settlement figure would reflect that the amount of insurance had decreased over time. 

The decreasing life insurance policy is designed to cover the cost of a repayment mortgage. For example, if the mortgage is £200,000, the policy will start with coverage for this amount. As the mortgage is paid down over time, the amount of insurance on the policy will also decrease in line with the outstanding mortgage balance. If you were to pass away during the policy term, the final settlement amount paid out would depend on how long you had the policy and would reflect the decreasing insurance coverage over time. For instance, if you had the policy for several years and had made substantial mortgage payments, the final settlement amount would be lower than the initial coverage amounts of £200,000.

Which life insurance policy is right for me?

So, there are significant differences between the policies being compared. However, choosing the right policy for you will largely depend on your personal needs and situation.

Level term life insurance

This is about a type of life insurance called level term life insurance.

  • payments stay the same for the duration of the policy unless you choose to change them.
  • There is a fixed amount of insurance, agreed when the policy is taken out.
  • When you take out the policy, you agree on a fixed amount of insurance coverage.
  • If you were to pass away during the policy term, your family could receive a cash pay-out that could be used to cover everyday living expenses, childcare costs, or help pay the mortgage.
  • This type of insurance can be a good choice for those who want to ensure their loved ones are financially secure.

Decreasing term life insurance

This is about a type of life insurance called decreasing life insurance.

  • Payments stay the same for the term of your policy unless you change it.
  • The payments remain the same throughout the policy term unless you decide to change them.
  • The amount of insurance coverage decreases roughly in line with the way a repayment mortgage decreases, since this type of policy is designed to help protect a repayment mortgage.
  • This option could be perfect for those who want to help make sure a repayment mortgage is paid off if they were to die during the policy term.
  • This could be a good option for those who want to ensure their mortgage is paid off if they were to pass away during the policy term.

Simply put, A level term life insurance policy will pay out a pre-agreed cash sum to your family if you were to pass away within the policy term. In contrast, a decreasing term policy pays out a cash sum that reduces throughout the policy term, typically in line with the decreases in a repayment mortgage.

Please click here to learn more about placing a policy in a trust.

What should I know before applying?

You can apply for both types of life insurance if you wish, but before getting a life insurance quote, consider the following:

• How much insurance do you want?

• Do you want a policy with a level or decreasing term, or even both of them?

• Do you want to purchase a single or joint policy?

• How long should the policy be in effect? For example, 15, 20, or 25 years.

• Do you want to include critical illness coverage?

• Will your situation change in the future?

• Do you think about trustees ?