Term life insurance: low cost protection for you and your dependants

Term life insurance is the cheapest form of life cover. For just a few pounds a month your dependants can be covered for several thousand pounds.

Term insurance gives you financial protection if you die within a specified period known as ‘the term’. This period might be 10, 15, 20 years or more, although you can arrange policies to cover you for periods as short as one month.

There is no investment element with term insurance, so if you are alive at the end of the term you will receive nothing back.

How does the policy work?

  • You decide on the amount of cover you need, this is called the ‘sum assured’.
  • The insurance amount remains level throughout the plan term unless you include the indexation option.
  • You can take out cover on your life or add your partner as a joint life policy.
  • With a joint life policy the sum assured is paid on the first death or on diagnosis of a terminal illness if this option is included in your policy. Most policies now include terminal illness benefit so if you are diagnosed with a terminal illness the policy will pay out while you are still alive.

How does the policy work?

  • Check that the policy has terminal illness benefit included. his is a valuable extra which will pay the insurance amount early if you suffer a terminal illness, allowing you to make arrangements for your dependants while you are still alive.
  • Can the policy be set up in trust? This will avoid any delay in the money going to your dependants and the risk of inheritance tax being charged on the benefit.
  • Can waiver of premium benefit be included in your plan. This is a valuable extra which, if you become too ill to work for a number of months, will ensure your cover continues without you having to pay the premiums.
  • A valuable feature of some policies is counselling for your family if you die?
  • Check that the premiums are `Guaranteed´. This means the premiums are guaranteed to remain the same throughout the term of your policy. This is opposed to `Reviewable´ premiums which, as the name suggests, are reviewed usually every 5 years and can increase dramatically.
  • If you are looking for term life insurance and critical illness, you can make big savings by buying a combined policy. These only pay out one lump sum rather than the two that separate policies would pay, if you suffer a critical illness and then die.
  • If you are self-employed or in a partnership, you can save money by getting tax relief on term insurance and family income benefit by taking it out under pension law. There are special policies which allow you to do this.

Common policy options

You can include one or more options to improve the level of protection provided by your policy. Adding any of these options will increase the premiums.

  • Waiver of Premium
    If you are unable to work due to illness or injury, your insurance company will continue to pay your premiums and keep your cover in force.
  • Critical Illness Cover
    The insurance benefit will be paid if you are diagnosed as having a critical illness covered under the policy.
  • Indexation
    Your cover and premiums increase each year to stop inflation eroding the real value of your cover over time. Without indexation inflation can seriously eat away at the value of the payout. Even at 3% a year the value of your cover will have fallen by 26% after only 10 years.

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