When you buy life insurance, you’re usually doing so to make sure your family could pay for all the things they need to if you die. In many cases, the things they need to pay eventually reduce or completely go away.
Your need for life insurance doesn’t always last forever – because life changes. Partners get older, children grow up, debts get paid off. The money that would be needed if you died today is probably different to what would be needed if you died in 20 years’ time. If you died in 40 years’ time, perhaps no money would be needed at all.
This is why term life insurance exists. It’s a kind of life insurance cover designed to protect you for the time that you need protection, so you’re not paying for life insurance any longer than you need to. When you take out a term life policy, you choose how long you’ll be insured for (the policy term) – and if you die during the term, your policy pays out a lump sum. If you don’t die during that time, your policy ends when the policy term expires, and you’re no longer insured.
It’s a kind of life insurance cover designed to protect you for the time that you need protection, so you’re not paying for life insurance any longer than you need to.
Having a policy term makes this kind of cover very affordable. It’s cheaper than the kind of life insurance that covers you for your whole life, for example. It’s a good way of protecting only the period of time you need – and it’s also a good way of protecting yourself according to what happens to your needs over time. This is because you can either buy level term life cover or decreasing term life cover.
Decreasing term life insurance
Term life cover pays out a lump sum if you die during your policy term. If you buy decreasing cover, the amount paid out decreases over time. So, if you die in 5 years’ time, the payout would be higher than if you died in 20 years’ time, for example.
Decreasing term life cover is suitable for you if your needs decrease over time, and eventually go away. In other words, if the money you’d need in 20 years’ time is less than what you’d need in 5 years’ time. This is often the case if you have an outstanding mortgage, or if you have children who’ll eventually become financially independent.
- Pays out a lump sum if you die
- Covers you for a fixed policy term (e.g. 10, 20 or 30 years)
- The lump sum amount decreases over time
- Often cheaper than level term insurance
Level term life insurance
Term life cover pays out a lump sum if you die during your policy term. If you buy level cover, the amount paid out stays the same over time. So, if you die in 5 years’ time, the payout would be the same as if you died in 20 years’ time, for example.
Level term life cover is suitable for you if your need for life insurance will stay the same over time, but eventually go away. In other words, if the money you’d need in 20 years’ time is the same as what you’d need in 5 years’ time – but you only want or need to protect your family for a set period of time.
- Pays out a lump sum if you die
- Covers you for a fixed policy term (e.g. 10, 20 or 30 years)
- The lump sum amount paid out always stays the same
- Usually more expensive than decreasing term insurance, but cheaper than whole-of-life cover
Who's term life insurance suitable for?
Term life insurance is appropriate for anyone whose need for life insurance will eventually go away.
Most people buy life insurance because they have financial commitments or dependents – but if those commitments reduce or dissipate over time, and those dependents will eventually become independent, your need for life insurance will end at some point in the future. With term life insurance, you can time it so your cover ends at the same as your financial liabilities do.
Term life insurance specifically designed to cater for this kind of scenario. It’s a way of making sure you don’t pay for life insurance any longer than you need to. Here are some examples:
| Reason for buying life insurance | How term life cover meets this need |
|---|---|
| Making sure your loved ones could pay off your debts (e.g. a mortgage) | If you die after your debts are paid off, you’ll no longer need life insurance to cover them. With term life insurance, you can time it so that your policy ends as soon as your debts are paid off, so you’re not paying for life insurance for any longer than you need to. Example: If your remaining mortgage term is 25 years, you could buy term life insurance to cover you for 25 years. |
| Making sure your partner could cope financially without you and your income | As your partner gets older, they’re like to become more financially independent. This could be because they’re earning more money, your children are growing up and becoming financially independent too, or they’re part of a new family. Term life insurance can protect your partner’s financial future up to the point at which they could cope by themselves. Example: You could buy term life insurance to make sure your partner is covered financially until they retire when they’re 68. If they’re 38 now, you’d need life insurance with a term of 30 years. |
| Making sure your children would be provided for without you and your income | Children are financially dependent on their parents, but tend to become independent as they complete education and start earning their own money. Whether you’re a single parent or you’re parenting with a partner, there’s likely to be a financial shortfall in your household if you die while you’re children are still dependent on you. Term life insurance can protect your children’s financial future for the time that they’re dependent on you (and beyond, if you prefer).
Example: You could buy term life insurance to make sure your children would be covered financially until they reach age 21. If your youngest child is 1, you’d need life insurance with a term of at least 20 years. |
Alternative types of life insurance
Whole-of-life insurance
Unlike term life insurance, whole-of-life insurance has no policy term. You’re insured for your whole life and the policy pays out when you die – whenever that happens. This kind of cover is suitable for someone whose need for life insurance will never go away; or who knows they always want to leave a lump sum to their loved ones. Our guide to term life insurance vs. whole life insurance will help you choose between the two.
Over-50s life insurance
Like whole-of-life insurance, with over-50s life cover you’re insured for your whole life. The policy pays out when you die, whenever that happens. This kind of cover is designed with an older age group in mind and, unlike term life insurance, doesn’t require medical underwriting (so you’re guaranteed to get covered, regardless of your health).
Family income benefit
Family income benefit works like term life insurance in the sense that you buy cover for a fixed term, but instead of paying out a lump sum if you die, it pays out a monthly amount for the rest of the time you’re insured. It’s designed with families in mind – a practical way to make sure they’d be able to keep up with the monthly expenses without you.
- Term life insurance pays out a lump sum if you die within the term of your policy
- You choose the policy term when you take out cover, based on how long you need to be insured for
- You can either buy decreasing term life cover (where the payout amount decreases over time) or level term life cover (where the payout amount always stays the same)
- Term life cover is suitable for you if you only need to be insured for a set period of time
- It's more affordable than life insurance that covers you for your whole life
What is life insurance?
Who needs life insurance?
How much does life insurance cost?
Does life insurance always pay out?
Is it easy to claim?
