Term Life Insurance Explained

Term life insurance pays a lump sum in the event of death within a specified period of your choice (known as the 'term'). Premiums are normally paid monthly though some policies allow annual pay.

There is no investment element with this form of life insurance, as such if no claim has been made there is no maturity value payable at the end of the term.

Term life insurance is the cheapest and simplest form of life insurance. You are covered for as long as you pay the monthly premiums. If you stop paying the premiums, the policy stops.

Level

• the lump sum is payable on the event of death. This lump sum remains level throughout the period of the life insurance term.

Decreasing

• a lump sum is payable on the event of death. This lump sum decreases by a fixed amount during the period of the term, decreasing to nil by the end of the insured period. Decreasing life insurance is usually used for mortgages or other loans where the amount owed decreases year on year.

Increasing

• the sum assured is reviewed each year and the assurance company will write to you to inform you of the revised sum assured, typically increasing in-line with inflation. The premium will also rise if you accept the increase in your cover.

Family Income Benefit

• This type of cover, gives your loved ones a regular monthly income not a lump sum. (this income is not taxable as earned income) But the income is only paid for the term of the policy, so the nearer the end of the policy you die, the fewer years it pays out for.

The premiums you pay will depend on the sum to be insured, the period of insurance cover, your age, health and whether you smoke or not. A non smoker is usually defined as someone who has not smoked or used nicotine products for at least the last twelve months.

Recently some insurance companies still charge a higher premium for ex smokers depending on when they have stopped. If you are an ex smoker its is worth checking this out with an advisor before completing an online application.

• Critical Illness: a lump sum is paid in the event of diagnosis of qualifying critical illnesses. You can save money by combining term insurance with critical illness cover. However, depending on the policy type, this may provide a single payout should death follow a critical illness diagnosis, rather than two payout's if cover is obtained separately.
• Terminal Illness: the lump sum is paid early on diagnosis of a terminal illness. This allows you to make arrangements for your dependents whilst you are still alive.
• Waiver of Premium: if illness prevents you from working your monthly premiums are paid on your behalf for after a set deferment period. Check the quotes Key Facts documents for each quotation produced.
• Guaranteed Premiums: guaranteed premiums ensure that the premiums remain the same throughout the duration of the policy term. Alternatively 'reviewable premiums' require the premiums to be reviewed periodically, typically every five years, meaning that premiums can increase following review.
• Trusts: This can avoid delays in money going to dependents and can avoid the risk of having to pay inheritance tax.

The financial Conduct Authority does not regulate inheritance tax planning and trusts.

The terms and conditions of term life insurance policies vary, so make sure you understand the scope of the cover being offered by reading the insurance companies Key facts document before taking out the policy.

Single life

• Pays out on death of life assured

Joint life first death

• Pays out once death of first policy holder then stops (normally taken for protection)

Joint life Last survivor

• Pays out once on death of the second policy holder (normal taken for inheritance tax planning )Always complete any term life insurance application honestly as failure to do so will result in the insurer refusing to pay on the event of death. Medicals are some times required (paid for by the insure), in some circumstances a report may be required from your doctor before you term life insurance policy is accepted.

When you buy life insurance, it is crucial to answer health questions honestly. Failing to do so could lead the insurer to deny your claim. You may need to complete medical exams paid for by the insurer. The insurer may also require a doctor's report before accepting your policy.