Term life insurance is life insurance which you take out for a limited time period, such as 15 or 20 years, and which will pay out if you die within that time. You can use it to ensure your mortgage is repaid, or to make sure your family is looked after till your children have grown up.
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How does term life insurance work?
During the term of the life insurance policy you pay a monthly premium for a given amount of cover. In return, the insurer will pay out the specified lump sum to your named beneficiaries if you die while the insurance is in force. If you want to be covered for life, you should check our guide about whole of life insurance.
How much is level term life?
The cost of level term life insurance premiums depends on the length of the term for which you want to insure, on the sum insured, and on your age and state of health when you take out the policy.
For instance, a 25 year old taking out a 20 year £200,000 level term life insurance could expect to pay £7-12 a month, while a 45 year old would pay £25-50 a month. Smokers will generally pay towards the top of that range, as well anyone with minor health issues.
Should I take level term life insurance?
Level term life insurance is a good way to ensure that your family is covered if you die while your children are still young. You could, for instance, take out an insurance that would repay your mortgage and leave enough money to pay for the children’s university education.
But remember that term-life insurance isn’t renewable – once the period ends you’re no longer covered. If your aim is to create a nest-egg for the next generation, even if you live to be 100, then whole life insurance is what you need.
What are the best term life insurance policies?
The best term life insurance for you might not be the same as for someone else. You might want to specify a larger or smaller sum insured, for a longer or shorter period. And of course, your age and state of health will have an impact on how much you pay in premiums.
We tracked down prices from trusted insurers for a 35 year old non-smoker wanting to insure £150,000 over a 20 year term.
What happens at the end of my level term life insurance policy?
When you reach the end of a term-life-insurance, you stop paying the premiums. That’s it. If you’re still alive, the insurance doesn’t have to pay out. Just as happens with your home or car insurance, you’ve paid the premiums and you didn’t make a claim. There is no refund.
What are the pros and cons of level term life insurance?
The big pluses of level term insurance are that it’s cheap and gives you certainty, but it does have disadvantages too.
- It’s cheap, compared to whole-of-life
- you can set the term that works for your particular circumstances
- you know exactly what lump sum will be paid out if the worst happens
- inflation could erode the value of the lump sum insured
- if your main aim is to pay off a mortgage, you may be paying too much – since the sum insured will stay the same, while you’ll have paid a lot of your mortgage off by half way through the term
- if no claim is made, your premiums are ‘lost’. There’s no chance to surrender the policy as there is with a whole-of-life insurance.
What is decreasing life insurance?
With decreasing term life insurance, the amount of payout on death declines over time. It has several uses, but one accounts for the vast majority of policies – it’s used to cover mortgage debt, and it’s often called ‘mortgage life insurance’. If you have a repayment mortgage, the amount that you owe falls every month as you repay a little more of the debt, so decreasing term insurance is useful as the sum insured also decreases in the same way.
How does decreasing term life insurance work?
As with any other term life insurance, you pay a monthly premium; in return, the insurer promises to pay out should you die during the period (‘term’) that you’re insured. The payout will decline gradually from 100% of the sum insured at the start of the term to 0% at the end.
Do I need life insurance to cover my mortgage?
Whether you need life insurance for your mortgage is often not up to you – your lender may make it a condition of the loan, because it’s one way they can ensure they get repaid if you’re run over by a bus!
But if you have a joint mortgage, you might want to make sure your half of the debt is paid if anything happens to you, so that your partner doesn’t have to sell the property. Decreasing term life insurance can help protect your partner and family if the worst happens.
Do you need life insurance to get a mortgage?
No, you don’t need to have life insurance already in place. If a lender wants you to get mortgage protection life insurance, you’ll be able to do so at the same time as going through the mortgage application process. The lender also can’t specify what insurer you should use, or force you to take their in-house insurance (which can sometimes be quite expensive); you’re free to look for the best quote.
While usually a mortgage and life insurance combination works well, decreasing term life insurance isn’t appropriate if you have an interest-only mortgage, for instance on a buy-to-let property.
These expect you to pay back the full amount of the loan at the end of the term, for instance by selling the property, so you’d need to take out a level term policy instead.
How much cover do I need to take with my decreasing life insurance?
You need to take out enough life insurance to cover your mortgage – that is, to pay off your mortgage completely. You only need to cover your mortgage, not the full value of your home.
You also need to make sure that you match the term of your mortgage with the term of the insurance. So, for instance, if you have a 25 year mortgage for £225,000, then you need £225,000 decreasing term life insurance, over a 25 year term.
You can use a decreasing term life insurance calculator to see how the amount you need to insure falls over the term of your mortgage.
How much does mortgage life insurance cost?
How much you’ll pay for mortgage life cover depends on your age and health and the amount of your mortgage – but as a rough guide, a 25-35 year old wanting to cover £110,000 on a first home might expect to pay £10 or so a month.
You’ll pay more if you’re a smoker or if you have long term health issues. And obviously, if you have a bigger mortgage, you’ll need to scale up the insurance premiums too.
However, you can save yourself a lot of money by making sure you compare the best quotes for life insurance and mortgage protection.
What are the pros and cons of decreasing life insurance?
One big plus of decreasing life insurance is that it’s cheaper than level term life insurance. But it has disadvantages too.
- It’s cheaper than level term insurance. That’s because the insurer will provide a lower level of cover as time goes on. Usually, decreasing term insurance will cost between 60% and 80% of an equivalent level term policy.
- If you have no dependents, decreasing term insurance will cover your mortgage at the lowest cost.
- There is no maturity value for the policy, and at the end of the term, you could be paying a high premium for very little cover.
- If you have a young family, a level term policy could make more sense – since you’ll want not just to pay off the mortgage, but also to leave a lump sum to help support your children till they’re old enough to look after themselves.
What are the best decreasing life insurance?
Obviously, the best decreasing term life insurance policy for you will depend on the amount you want to insure, and how long you want to insure it for, as well as your age and health. This table shows quotes for the same individual as in the preceding table – a 35 year old non-smoker – and the same sum and term insured (£150,000 over 20 years). You can see that the decreasing term insurance is considerably cheaper than the level term insurance, with the best quote coming in below £5 instead of above £7.
Should I take level term life or decreasing life insurance?
This decision depends on your reasons for taking out life insurance. If you want to make sure your family is protected if the worst happens, level term is best – it will pay out the agreed sum even if you die just a week before the end of the term. On the other hand if you just want to make sure the mortgage, or your share of the mortgage, is paid off, decreasing life insurance will do the job, and will cost you less.