What is term life insurance?
Term life insurance covers you for a specified amount of time – or the term of the policy. You can choose the length of time you want, whether it be 1 year or 50 years. Often, people think about when their dependants may start earning their own income or the number of years left on a mortgage.
There are three different types of term life insurance: decreasing cover, level cover, and increasing cover. We currently offer increasing and decreasing cover. Here’s an overview of the differences:
Over time, the prices for everything from food to haircuts go up, and the average increase is known as inflation. With increasing cover, the policy takes changes to inflation into account, meaning that your pay-out amount rises alongside the inflation rate. This means your premium can also go up. Inflation is measured a number of ways, we use the Consumer Prices Index (CPI) to determine inflation each year and adjust our policies in line with these changes, however if CPI doesn’t increase then the cover amount and premiums will not increase.
For example, if someone took out a life insurance policy that offered a payout of £100,000 today, that money might not go as far in 20 years, thanks to inflation. Its monetary value would still be £100,000, but it wouldn’t buy you as much coffee and cake (and we wouldn’t want to live without coffee and cake).
Though you might not notice inflation day to day, or with smaller amounts of money, the effect on a life insurance policy can be considerable. However, with our increasing cover, you can opt out of the increased premiums each year.
With decreasing cover, the value of your policy gradually reduces over the policy term until it reaches £0 – however, your premiums never change.
Usually, the value of this sort of policy is set to reach £0 at the same time as a repayment loan or mortgage is due to be repaid. You can choose to cover only what you need – the amount and duration of the loan. The benefit of decreasing cover is that, if the policyholder dies, the benefit amount will be enough to repay the mortgage or loan– and, as the cover amount reduces over time, premiums tend to be lower than for level or increasing term insurance. The money could also used be to help cover living expenses.
If you have a family, you can have peace of mind that if anything were to happen to you, they would be able to stay in the family home. Because this cover is typically for the length of a mortgage, people tend to think of it as mortgage life insurance.
Which type of term life cover should I get?
The cover you need depends on your circumstances. Think about the things you’re looking to protect, like a mortgage, whether you would like to help your family maintain your lifestyle if you were no longer around.