What are the pros and cons of term life insurance

Term life insurance is the option most commonly found when searching for life insurance. It is a type of life insurance product that provides a benefit upon death if death happens within the policy 'term'. The term is the number of years that you take your insurance for.

There are a number of situations when term life insurance is the right solution and others when it won't fit the bill. To help you work out if it's right for you, we'll look at the facts as well as the pros and cons of this particular type of life insurance.

You can jump ahead to read about Buying Term Life Insurance at the best rates and getting up to £100 cashback when you buy.

Term Life Insurance - Facts

• A contract between a person(s) and an insurance company
• The policy continues to insure you as long as you keep paying for it
• You'll have a choice of leaving a lump sum or an income if you die during the term
• Lump-sum term life cover can be set to be level term cover, reducing term cover or increasing cover
• If you choose an income it can be set to increase or stay the same over the term
• The policy can be arranged for single or joint lives
• The policy has no value other than in the event of a claim during the term
• The premiums/payments for this type of policy are usually fixed
• The cost of term life insurance is based on your age (more expensive as you get older), your smoker status, your health/occupation/pastimes, how much you want it to pay out and how long you want to be insured for

Term Life Insurance - Pros

Suitability

The main things we worry about during our working lives are:

1. ensuring there is enough money to pay off debts if you die before repaying them
2. ensuring your family can financially survive if you die

Term life insurance works for both of these scenarios because you need an amount of money to be paid out if you die within a period of time. After your mortgage/debts are paid off or your children become financially independent, the insurance can stop. So term life insurance fits the needs of someone who is worried about providing for these needs. A specialist life insurance broker* can help you navigate the different forms of life insurance to ensure that you're getting the best insurance for what you need and also paying the best rates for it.

Value for Money

• It is the cheapest way to insure against death if you need the insurance for a limited number of years.
• There is not usually a qualifying period so a full payout can be claimed even if death happens immediately after starting the policy.
• The policy has a fixed cost that won't increase over years to come, meaning it is easy to budget for.
• If you are a couple and are interested in insuring you both, taking a policy each won't cost much more than a joint policy and so you'll have double the cover.

Flexibility

• You can cancel the insurance at any time.
• You can buy multiple policies to protect different things.
• You can increase your insurance within certain limits without having to go through medical questioning again.
• You can take a convertible or renewable option that costs more but allows you to switch to a whole of life insurance plan or renew the existing policy.
• Some policies include a separation option for joint policyholders in case they wish to separate their policies in the future.
• You can split the payout between different people using a trust.

Additional Options

Here are some things that add value to your term life insurance:

• Terminal Illness Benefit - allows you to claim the death benefit early if you are diagnosed with less than 12 months to live (usually included at no extra cost)
• Critical Illness Benefit - allows you to claim a lump sum of money if you are diagnosed with a serious illness like heart attack, cancer or stroke even if you survive. (additional cost)
• Waiver of Premium - allows you to continue your insurance without paying for it if you become incapacitated to work (may cost extra)
• Indexation - your benefit amount and your monthly cost will increase, usually each year so that the value of your life insurance isn't eroded over time and keeps up with inflation. (cost of insurance increases each year, usually by the Retail Price Index)

Term Life Insurance - Cons

Suitability

Term life insurance stops insuring you after your chosen time period so it could run out before you die.

It won't be suitable if you want to:

1. ensure the inheritance tax that is payable on your estate is funded after you die (not including potential inheritance tax on gifts made during your lifetime as these are time-bound)
2. create a benefit for someone upon your death whenever that happens

Actually, anything that you need to fund upon your death, regardless of how long you live is not best served by a term life insurance policy as it is not a permanent life insurance.

Value for Money

• If your health is poor, you might have to pay a high price and you could even be declined for the insurance. If you have poor health, we recommend you speak to a specialist life insurance adviser* to find the best insurance company and product for you. Alternatively, you may want to consider an alternative product such as Over 50s life insurance as you are guaranteed to be accepted.

Flexibility

• You can't extend the policy once it reaches its end date unless you take a 'convertible' or 'renewable' option which would cost more
• There are limits to how much you can increase your policy without having to go through medical questioning again.
• You can't usually reduce the level of your insurance without reapplying for it.

Buying Term Life Insurance at the best rates

Term Life Insurance quotes are widely available through insurance comparison sites online. That can be a good place to start your research. However, be mindful of the fact that the search engines won't tell you if you're making the right choice and usually won't take any responsibility if you buy the wrong policy for your needs. Often, the price isn't accurate because it doesn't allow for your health, occupation and pastimes. Furthermore, you might end up missing out on benefits that you can include with your policy at no or little extra cost.

Although term life insurance is amongst the simplest of the life insurance products available, it still requires a bit of guidance to get it right. We would recommend that you double-check with a specialist life insurance adviser*.  The advice they give is free and they are likely to find you a cheaper price.

In addition to searching for the best prices, specialist life insurance advisers will take the time to understand what you want from your life insurance cover and will provide advice on what to buy so that you have complete peace of mind. They can tailor your life insurance to meet your specific needs in ways that may not be apparent through an online insurance search. Every life insurance company works to its own set of guidelines and some life insurance companies will have more favourable terms available to people who may have a history of health issues or other factors to consider.

In our bid to find the best and the cheapest options for life insurance, we vetted the services of a company that provides bespoke advice in this area without charging you a fee. As part of the service, you'll also be guided to complete a 'Trust' to ensure that the money from your life insurance goes to the right people without delay and isn't liable for inheritance tax. You can arrange a callback from a qualified adviser by completing this form*. You'll also qualify for up to £100 cashback for arranging your life insurance.

 

If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article - LifeSearch