Term Life Insurance Explained
Life insurance can be off-putting with all its complicated terminology and strange exceptions that can make it seem like a confusing scam more than a solid personal financial product.
Here at Compare UK Quotes, we want to help you get a full understanding of life insurance and have teamed up with the experts at Quick Quote Life to bring you this easy-to-understand (but detailed) explanation of term life insurance.
Sometimes you see the word ‘assurance’ rather than ‘insurance’. In the UK life insurance industry, the two terms mean pretty much the same thing.
Technically, assurance refers to a policy that will definitely pay out at some point, while insurance only pays out on certain criteria that may never come to pass.
The reality is that all term life insurance policies are insurance rather than assurance, but that doesn’t stop the industry using the titles decreasing term assurance (DTA) and level term assurance (LTA)!
Term means ‘length of time’. Remember when you were at school and the year was divided into three terms? Yup – same word.
In life insurance, a term is the length of time that a policy is in existence for. Once the term ends, the life insurance policy stops and you are no longer covered. It’s as simple as that.
For the insurance company, most life insurance is a gamble of sorts - they are hoping that you will outlive your term life insurance and that they will never have to pay out. In fact, this is how they make their money – by keeping their customers alive!
A whole of life policy is one which has no end date and literally covers you for the whole of your life. It is not considered a term insurance policy, but a whole of life assurance police (assured because unfortunately, one day we do all die and thus the policy is guaranteed to pay out).
The problem is that the only way a whole of life policy makes financial sense for the insurance company is for them to try to recover the entire value of the policy through the premiums you pay. This means premiums on a whole of life policy are considerably higher than a similar level of cover with a set term.
So, when looking at the question on which is better out of term life insurance or whole life insurance, the answer is down to the size of the premiums. For most people, term life insurance is a superior product.
There are two types of term policies: level term insurance where the sum assured (the final payout amount) remains the same (level) and decreasing term insurance where the sum assured drops over time (decreasing).
Decreasing term insurance is typically tied to a mortgage. As time goes on, your mortgage becomes lower as you pay it off each month, meaning there is less needed on the policy to make sure the mortgage is paid for if you died within the term – therefore, the sum assured drops too. This leads to an impressive deal from the insurance company who see decreasing policies as a significantly lower risk than the level term alternative. Decreasing term insurance has a very low cost to the customer with cheap premiums throughout the term.
Due to this tie to the mortgage, decreasing term insurance usually has a term to meet the length of your mortgage exactly, whether that’s 25 years, 20 years or only a few if you are obtaining the policy after some time of paying for your home.
Level term insurance is designed to cover other financial responsibilities that you have – for example, paying for your children’s education, or providing a substantial inheritance to those you leave behind. Level term insurance is typically set to match the time where you are responsible in that way – for example, until the children are 21, or until you retire.
For most people, decreasing term insurance is an ideal solution to provide additional financial security for their family while you have a mortgage.
Level term insurance is a great way to make sure your family isn’t out of pocket generally should you pass away, covering anything from funeral costs to a promised car on a child’s 17th birthday.
Life insurance is a product whereby the insurer agrees to pay your beneficiaries a sum of money should you pass away. It is not an investment or a savings account and once the premiums are paid in, there is no way for you to reclaim the money.
Importantly, should you miss payments on your term life insurance policy, it may be cancelled, and you would lose your cover.
Many mortgage providers insist on you having decreasing life insurance in place before taking out the mortgage.
There are other types of mortgage protection insurances, but when discussing mortgage insurance, it is usual that what is meant is decreasing term life insurance.
Outside of the two main term life insurance policies, the other type of life insurance is whole of life insurance, which covers you until you die, no matter the age, and over 50s life insurance which is a subset of whole of life cover that is designed for those who have an existing medical condition. Over 50s life insurance is an ‘ask no questions’ guaranteed type of cover to help with funeral costs and other inheritance issues for those getting life insurance later on in life.
Both whole of life and over 50s insurance policies are better suited for the more senior customer, where both decreasing and level term life insurance options are developed with growing families in mind and tend to appeal to those still in full-time work.
At Compare UK Quotes, we recommend Quick Quote Life as a life insurance broker and advisor. You can give them a call (obligation-free) and speak to one of their expert life insurance advisors for a personalised life cover quote as well as additional help and advice.
Alternatively, take a look at our articles regarding life insurance to get fully informed and then shop around to find the best quote to suit you.