What type of term life insurance policy is right for me?
The kind of cover you need depends entirely on your circumstances. What do you need to protect? Is it a mortgage? Or perhaps you have dependents you want to care for, should you pass?
Depending on what you want your payout to be put towards, the length of your term can be longer or shorter. You can choose between a level-term life insurance policy or a decreasing-term life insurance policy.
What is a level-term life insurance policy?
A level-term life insurance policy provides a lump sum payout if you die within the designated time frame. As the name suggests, the coverage amount remains constant throughout the term.
Level-term policies can be a great choice for family protection - letting you leave a lump sum for your loved ones. This gives you the opportunity to invest in their future after your passing.
A level-term policy can also be a suitable option for covering a specific amount of debt for a set period. This might be an interest-only mortgage not covered by an endowment policy.
If your life insurance isn’t claimed before the term ends, you won’t receive a payout. Level-term life insurance is also usually more expensive than decreasing-term life insurance - which we’ll get onto next.
So what is a decreasing-term life insurance policy?
In a decreasing-term policy, the coverage amount diminishes over the policy’s term. Basically, the value of your policy gradually reduces over the term until it reaches £0. Crucially, your premiums don’t change.
These policies are often used to cover debts that decrease over time - like a repayment mortgage. In this case, your life insurance policy should allow your loved ones to pay off your remaining mortgage debt if you die.
Premiums for a decreasing-term life insurance policy tend to be more affordable than level-term coverage as the insured amount reduces over time.
Great. What’s the catch?
As your policy falls to zero, there’s no chance of a payout should you survive past the term’s end. It’s also unlikely that a decreasing-term life insurance policy can help your loved ones cover other financial problems relating to your death. (We’re talking cheery stuff, like funeral costs and probates).
How about family income benefit policies?
Family income benefit life assurance is a variant of decreasing-term policy. Instead of providing a lump sum if you pass away, it offers your beneficiaries a consistent income until the policy expires. You can arrange for an amount equal to your net income to be disbursed to your family in the event of your death.
Can I choose an increasing-term insurance policy instead?
In short, yes. In this case, the premiums and coverage will rise during the policy’s term. This can be used to keep pace with inflation or cover a growing debt. You might choose increasing-term insurance to safeguard your policy’s value against inflation (the escalating cost of living) whether for debt repayment or a significant purchase.
Protect the future of your loved ones
Taking stock of your financial situation is always a good idea. With a term life policy, you can rest easy that those you care about most will be taken care of after you’re gone. And who can put a price on peace of mind?