Life Insurance

What is term life insurance?

Friday, 1 May 2009 By Seamour Rathore
seamour.rathore@consumerchoices.co.uk

Don’t let worries over cost put you off getting life insurance. Prices have dropped 50% in the last 10 years, making it an affordable way of ensuring dependents don’t suffer financially, if you were to die.

Term insurance, a form of life insurance, is vital if you have dependants and you are the main breadwinner in the house. The policy, also known as term assurance, will pay out if you die – enabling the beneficiaries, for example your partner and/or children, to receive income that replaces your salary or pays off major outstanding debts, such as the mortgage.

Two-thirds of people overestimated the cost of term insurance, according to the findings of a recent survey among almost 2,000 adults by insurer Legal & General. As a guide, £150,000 of level term assurance cover over 25 years for a healthy non-smoking man aged 25 costs only £8 a month.

In this guide, we’ll look at different types of term insurance and how to get the best-priced cover.

Term life insurance features

Term insurance is one of the simplest forms of life insurance. The “term” element refers to the length of the policy. You decide exactly what length you want. This is normally linked to an important event – such as your retirement date, ie the point up to which your household requires your salary from work. It could also be the length of your mortgage term.

One thing to bear in mind with term insurance is that it only pays out on the death of the policy holder. If you take out a policy for 25 years – the term – and you are still alive at that point, the policy ends and it has no cash value. Therefore you shouldn’t view term insurance as an investment.

Nor should you view term insurance as a form of income protection – these provide income or payouts if you cannot work through illness or redundancy. For term insurance to pay out – the policy holder must be deceased.

If you are one half of a couple, the best plan is usually to take out separate policies. You can opt for a joint policy in both your names, though. You should take independent financial advice on which may be the best for your circumstances.

When you are deciding whether you need term insurance, you must check if you already have term insurance covering a particular financial product. For example, you may have taken out mortgage term insurance when you agreed your mortgage.

Also, you may find that through your job you have “death in service benefits” – which will pay out a stated multiple of your salary to your named beneficiaries.

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What types of term life insurance are there?

There are several types of term insurance, but the two you’ll come across most frequently are:

Level term insurance - The pay out is the same for the entire duration of the policy.
Decreasing term insurance – The pay out and premiums decrease during the duration of the policy. This is often used to cover your repayment mortgage – so the insurance will pay out what is outstanding on the mortgage if the policy holder dies during the term.

There are other types of term life insurance too:

Family income benefit – With this type of term insurance, the policy pays out regular sums (income) rather than a lump sum.
Renewable policies – If your policy is renewable, you can extend the original term.

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How to make sure you get the right cover

There are several features of term insurance which you need to be aware of, so that you can manage finances sensibly.

Existing medical conditions – You must be absolutely honest and disclose everything about your health and lifestyle to your proposed insurer. If you don’t do this it puts the payout in jeopardy, in the event of your death.
Exclusions – These may cover risky sports or deaths related to drug or alcohol abuse. Check your individual policy.
Flexibility – Will your insurance provider allow you to vary the details of your cover, ie increase or decrease the payout? You may have to pay extra for this type of flexibility, but if you think you may need it, it could be worth it. Also, what happens if you miss a premium – is the policy cancelled immediately or can you catch-up? You may also want to make sure you are covered if you can’t work for a period of time. This is known as “waiver of premium” and under some policies it means that the premiums will be met, allowing the cover to continue.
Policies set up under trusts - You can set up a term insurance policy under trust – so that the payout goes directly to beneficiaries. A properly set-up trust can have favourable tax implications. You will need to take professional advice before setting this up.

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How to get the best deal on term life insurance

If you’ve assessed your need for term insurance and decided what features you’d like, then you’re ready to look at what the various providers in the market offer. A good place to start is to compare term insurance and then have a read through the policies of a short-list of providers which you have made.

Richard Eagling of personal finance information company Moneyfacts.co.uk says that although prices in the term insurance market are at all-time lows, people should do their homework: "Some policies are as much as five times more expensive [than others] - so why waste money needlessly?” he says.

Remember to take into account any life insurance you already have in place – or you could end up wasting money on your premiums.

If you already have cover its still worth checking whether you could save money on term insurance, but comparing your premiums to those of similar policies.

You may find that as the circumstances have changed - you’re older, for example - the premiums will be different from your existing policy. Although you can cancel an existing term insurance policy at any time, you won’t get back any money paid in.

Also ensure you are checking like with like. Features such as flexibility mentioned above may be something you want from the new policy, but it will come at an additional cost.

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