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.
We currently offer two different types of term life insurance: decreasing cover and level cover. Here's an overview of the differences:
For this option, you choose the cover amount and the length of time you’d like it for, and pay the same monthly amount for the duration of the policy. Though, remember that the policy has no cash in value at any time and if your payments stop, so does your cover.
With a level cover policy, if the worst happens and a claim needs to be made, the lump sum payment could help your family to maintain their standard of living, and can go towards paying monthly bills, such as rent, or a mortgage.
However, it’s worth bearing in mind that because your payments stay the same, the fixed cover won’t increase as the cost of living rises.
Protect against the effects of inflation
Over time, the price of everything, from food to haircuts, goes up. This average increase is known as inflation.
So, if someone takes out a life insurance policy that offers a lump sum 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 as much coffee and cake (and we wouldn’t want to live without coffee and cake).
If you’d like your cover to take inflation into account, you can opt for this as part of your level cover policy. Your cover amount will rise with inflation, and your monthly payments can therefore go up.
We use the Consumer Price Index (CPI) to determine inflation each year and adjust our policies in line with these changes. If CPI doesn’t increase, then the cover amount and premiums won’t increase.
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.
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 could 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 be used 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 may 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 their lifestyle if you were no longer around.