Term insurance pays a tax free lump sum in the event of death within a specified period of your choice (known as the ‘term’). Fixed monthly or annual premiums are paid for the duration of the term.
There is no investment element with this form of life insurance, hence if no claim has been made there is no maturity value payable at the end of the term.
Term insurance is the simplest and cheapest form of life insurance. A few pounds per month can provide cover for a payout of tens of thousands of pounds. You are covered for as long as you pay the monthly premiums. If you stop paying the premiums, the policy terminates.
Different types of term insurance are available:
‘level’ – a lump sum is payable on the event of death. This lump sum remains constant throughout the period of the life insurance term. This is the most common form of life insurance.
‘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. This form of cover is usually used for mortgages or other loans where the amount owed decreases year on year.
Single and joint life plans are available. A single life plan insures one life. A joint life first death plan insures two lives but only pays on the first death.
Premiums will depend on the sum to be insured, the period of insurance cover, your age, your sex and whether you smoke or not. A non smoker is usually defined as someone who has not smoked for at least twelve months. Premiums for women are generally lower as on average they tend to live longer.
Additional options can be added to increase the level of cover, although this in turn increases the premiums.
Medicals are not normally required, although in some circumstances a report may be required from your doctor. Always complete any life insurance application honestly as failure to do so will result in the insurer refusing to pay on the event of death.
Additional options and areas for consideration include:
- Critical Illness: a lump sum is paid in the event of diagnosis of certain 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 payouts 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 a predetermined period. Check your policy for the permissible period of premium non payments.
- Counselling: counselling may be included to help your family cope with your death.
- 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 dramatically following review.
- Trusts: can the policy be set up in a trust? This can avoid delays in money going to dependents and can avoid the risk of having to pay inheritance tax.
The terms and conditions of policies vary, so make sure you understand the scope of the cover being offered before committing yourself.