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Term Life Insurance

Get the highest payout at the lowest premiums. Term life insurance provides affordable coverage for a specific period, called the “term”. If anything was to happen to you during this time, the policy pays out a death benefit to your loved ones. The policy can be renewed after the selected term expires if the insured person so chooses and the insurer accepts the renewal based on the health conditions.

In This Article:

If you have loved ones that are dependent on you and your income, life insurance is an important part of securing their future. A life insurance policy can provide much-needed financial protection for your family and loved ones in the event of your passing.

This article will look at the pros and cons of term life insurance, how term life insurance works and whether or not it's the right life insurance policy for you, and your family.

You can decide whether you want whole life insurance that covers you for your entire life or term life insurance cover that will provide protection for a set period of time.

What Is Term Life Insurance?

Term life insurance is a type of life insurance policy that provides coverage for a specified period only. Terms typically run between five and twenty-five years but can be longer. For example, if you adopt a policy for a term of twenty years, your loved ones will receive a fixed cash lump sum amount if you die within the twenty-year period, provided that your premiums are up to date.

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A longer-term comes with a higher premium as your likelihood of death increases with age. A life insurance policy with the whole of life cover lasts until your death - whenever that may be - and is a lot more expensive than term insurance.

The Difference:

Term life insurance cover provides financial security for your loved ones in the event of your untimely death, whereas whole life insurance is generally associated with estate planning or leaving an inheritance. Your beneficiaries can use the payout amount they receive in any way they see fit, including making mortgage repayments, covering funeral costs, clearing debts, or investing for the future.

How Does Term Life Insurance Work?

Most individuals opt for level term life insurance. Your life insurance covers you for a set period and pays out a fixed lump sum upon your death. The length of the life insurance cover is agreed upon with your provider when you take out your policy. You need to keep up with monthly premiums to maintain your life cover; if you default for any reason, you won't be covered.

Can I Cash Out My Level Term Life Insurance Policy early?

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Term life insurance doesn't offer a cash-value benefit and can't be borrowed against.

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Does Term Life Insurance Come With Exclusions?

Your term life cover policy may have some exclusions. Some insurers will not pay out the death benefit if you pass away as the result of alcohol or drug abuse, suicide, or partaking in high-risk sports or activities. If you have a serious health problem when you take out your policy, any cause of death related to illness will probably be excluded.

Is Term Life Insurance Tax-Free?

Your beneficiaries don't need to pay income tax on the lump sum they receive, but if your total estate is greater than £325,000, they will need to pay inheritance tax at a rate of 40%. That means that a payout of £100,000 will see your loved ones receive £60,000. You can avoid inheritance tax by adding certain payouts and assets to a trust for your loved ones. More about avoiding taxation by putting your insurance in trust can be found in our Life Insurance Tips&Tricks Section.

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Can You Borrow From a Term Life Insurance Policy?

Term life insurance premiums are lower than permanent policies because they don't have cash value. You can't borrow against them, and if you surrender the policy, you won't receive any cash.

Different Term Life Insurance Policies

Before making a final decision, it's important to look at other life insurance options and alternatives:

Level Term Insurance

The payout remains the same no matter when the claim is made as long as the claim is made within the agreed term. Your monthly payments will stay the same, as will the fixed sum paid to your loved ones.

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Decreasing Term Life Insurance

Your pay out decrease over the term of the policy. If you've applied for a mortgage and your lender requires that you take out life insurance as a condition for approval, this is a great option for you. Your premiums won't become lower with decreasing term insurance. However, decreasing cover is still much cheaper than other forms of life insurance, which can be helpful when you are paying off a large debt.

Increasing Term Insurance

A great option if you would like more cover for your family. With this policy, pay outs increase over time. Your policy retains its value because the pay out increases along with inflation and the cost of living. The amount of cover can rise in line with the retail prices index or with a fixed annual amount. Note that your premiums will also increase over time.

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Picking The Policy Term

Depending on your insurance company, the term of your life insurance can last from as little as five years to as much as seventy years. Picking the right policy term can be tough, but it helps considering who you would like to protect when you buy life insurance.

For Example:

When you would like to help your loved ones pay off the mortgage of the family home after your death, your term should last as long as your mortgage payments. If you would like to provide financial support for a spouse or partner for everyday living expenses, like school fees while your children are still financially dependent on them, you should take our term insurance that lasts until your children come of age.

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Insurance Tip from Genius James:

If you want to provide your partner with a cash sum that makes up for lost income and covers household bills in the event of your death, your policy term should last as long as it would have taken for you both to reach retirement age.

Can You Buy Joint Term Life Insurance?

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Like with whole-of-life insurance, it's possible for a couple to purchase joint term life insurance that covers both of them with a single combined premium. Joint cover pays out once upon the first death. The surviving partner would have to obtain a new policy and may even face much higher premiums if they are of advanced age. Individual life insurance policies have higher premiums but provide better protection for the beneficiaries than the combined cover.

Two Life Insurance Policies are Better Than One

If you think having one joint life policy is better than having two life insurance policies, think again. In most cases, buying two separate life insurance policies will amount to a similar price as buying one joint life insurance policy - and in some cases, two might even be cheaper. The most obvious difference between these options is the payout. If you have two separate life contracts, you can expect two payouts if the insured person dies during the insured period. With one joint policy, you can only get one payout. Having a standalone policy also gives you more control and flexibility over what you want to do with your cover when difficult time and other things comes. 

More about this topic can be found in our Life Insurance Tips&Tricks section.
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Choosing What Happens When You Survive the Policy Term

What happens if an insured person is still alive when their policy term ends?

Once the term ends, you no longer have any cover. You can apply for a new insurance policy, or if your policy allows it, you can renew your existing term life insurance for an extended period of time.

Renewable term life insurance lets existing customers renew their limited duration policy without new underwriting, even if they've developed health issues since they first acquired the policy. With renewable term insurance, you will pay premiums that reflect your more advanced age, but you won't be required to complete a medical exam or go through the application process again.

Bear in mind

Your insurance company may have an age limit after which time renewals are no longer allowed, even with a renewable add-on to policy clause in place.

How Much Does Term Life Insurance Cost?

The cost of selected security varies depending on how much cover you need, your personal circumstances and the length of the term. Your insurer will also take your age, medical history and any pre-existing medical conditions you may suffer from into account, as well as your lifestyle and habits (e.g. whether or not you smoke or work in a high-risk environment).

According to Unbiased.co.uk, the average monthly premiums for whole life insurance can range from £15.85 to £30.40, whereas the average term life insurance will cost anywhere from £5.83 (at age 30) to £30.20 at age 50. Of course, your life insurance premiums will also fluctuate depending on whether you choose decreasing term insurance, increasing term insurance or level term life insurance.

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Alternatives to Term Life Insurance

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Term life insurance is an affordable and easy way of acquiring financial peace of mind for you and your family, but it might not align with your protection goals. If you aren't sure whether or not term life cover is right for you, you may want to evaluate all of the alternatives:

Income Protection Insurance

Unlike term life insurance, income protection provides a regular tax-free payment equal to 50-65% of your salary instead of a cash sum while the policyholder is still living but unable to work due to illness or injury. Income protection insurance covers most conditions, provided that you are medically signed off from work. The payments can run until you are fit to return to work or if you reach retirement age, or you can opt for a short-term cover that pays out for up to 24 months. A deferral period applies. This insurance policy is best for anyone that wants protection if they become unable to work.

Critical Illness Cover also known as Dread Disease Policy

Critical illness cover provides a payout if the bearer of the policy becomes critically ill. You will not receive a payout if you pass away suddenly, and it should not be confused with terminal illness cover. Unlike income protection insurance, critical illness cover is limited in the conditions for which you can claim. Policies can last as long as you like. You can add critical illness cover to your existing life insurance policy to protect your family against financial insecurity should you become ill and unable to work or purchase it as a standalone product.

Mortgage Protection Insurance

Mortgage protection insurance is similar to life insurance, but they pay out is restricted to paying off a mortgage. The pay out will help clear mortgage debt if you were to pass away while holding the policy, typically as a lump sum. It's a good option for individuals buying a home as most lenders require that borrowers acquire life insurance before they are approved for a home loan. Bear in mind that if you have an interest-only mortgage, a policy paying a fixed sum is preferred over a policy that decreases in value as your debt decreases.

Prepaid Funeral Plan

If you are less concerned about your beneficiaries' financial situation but would still like to cover the cost of your funeral, a prepaid funeral plan is a good option. Your funeral plan will cover the cost of cremation, burial and a simple funeral service. It can be purchased as a lump sum or paid off in monthly instalments. With a prepaid funeral plan, the pay out is protected from inheritance and other taxes.

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Death-in-Service Life Insurance Policies

Some employers offer a death-in-service policy to employees of their business, even if the circumstances of the death are not work-related. The pay out can be anywhere between two to four times your annual salary (or higher). It's not a required benefit that employers have to offer, and your cover will end when you leave the company at the end of your employment.


Term life insurance is a more affordable option than whole life insurance. You can cover a period of time according to your family's needs - the time you need to spend paying off a mortgage, the time it will take for your children to become financially independent, or the time it will take you and your spouse to retire. Speak to your insurance company about obtaining a life insurance quote based on your unique protection needs. A little bit of planning can provide a great deal of assistance when you need it the most.

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Term Life FAQs

What is level term life insurance?

Level term life insurance pays out a fixed lump sum amount if the policyholder passes away within the term agreed to in the policy. Because the amount payable is known beforehand, planning is simplified for you and your beneficiaries.

What is decreasing term life insurance?

Decreasing term life insurance is a policy that pays out less over time. It can be used to cover the balance of a decreasing debt (like a repayment mortgage).

What is a term plan in life insurance?

A term plan life insurance policy offers protection for a predetermined period of time (known as a term) and pays out a lump sum to the beneficiaries of the policy in the event of the policyholder's death, should that death occur within the term specified.

What's the difference between level term and decreasing life insurance?

With a level term life insurance policy, your beneficiaries will receive a pay out if you pass away with the term. For a decreasing term life insurance policy, the cash pay out will reduce throughout the length of the policy in line with decreases in debt repayment (usually a mortgage).

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