How long do I need life insurance for? Term policies explained
5 min read
Term life insurance is a popular type of life insurance. This just means you are covered for a pre-determined length of time, so your insurance will only pay out if you die within that timeframe, called the term of the policy.
Only around 40%* of UK adults have life insurance, even those with financial dependants. But taking out life insurance cover is one of the best things you can do to protect your family in case something happens to you. However, not just any old life insurance policy will do. It matters that the type of cover you have is the right fit for you.
One of the most important decisions you’ll need to make when buying life insurance is choosing the length of time that you’ll want to be covered for.
So, how do you choose the most suitable cover for you? First, you need to consider the following:
What do you need your life insurance policy to do?
- pay off your mortgage or other debts?
- leave a nest egg for your children or pay for their education
- pay for your funeral costs?
Depending on your priorities, there are different types of term insurance to choose from. For example, if your repayment mortgage is your main concern, you could get decreasing term insurance, where the size of payout goes down over time in line with your outstanding mortgage balance.
How decreasing term insurance works
So, if you’ve got a 30-year repayment mortgage, you could choose decreasing cover that lasts for 30 years. This can be a cheaper way of doing it than if you went for level term cover, where the payout amount stays the same over the whole length of the policy.
Of course, you could use level term cover to pay off your mortgage, but the amount it pays out will be the same no matter how much of your mortgage balance is left. That means if you die towards the end of your mortgage term, you’ll have an additional cash lump sum to leave to your family, but you will probably pay more in premiums over the length of the policy.
Another option is increasing term insurance, where the amount of the payout goes up over time so it keeps pace with the rising cost of living. This is usually a more expensive option.
A common way to choose the right policy length is to base it on how many years your children will be financially dependent on you. This might be 18 to 25 years, depending on whether you wanted a payout to support them if you died while they were still in higher education, for instance.
Popular cover lengths for life insurance
The length of term you choose affects how much your premiums cost, but so does your age. So, if you are young you’ll usually pay less for life insurance, so it might make financial sense to take out a longer policy for a longer length of time while it’s cheaper.
One survey found that the most popular cover term among UK consumers last year was 21 to 25 years, accounting for more than a quarter of life insurance purchases and costing an average £17.63 a month. Cover lasting 31 to 40 years accounted for about 20% of total purchases and cost on average £16.64 a month in premiums, while cover for 26 to 30 years made up around 19% of the total and cost on average £18.41**.
What happens if you outlive your insurance term?
If you live longer than the length of your policy, the cover ends. You don’t get a payout or any of your premiums paid back. At this point, you could take out a new policy but, depending on how old you are, the premiums could be high. That’s why it’s generally better to take out a policy for a longer length of time while you’re young. This will make it more affordable.
If you’re not sure what’s the best option for term insurance, you could also consider whole-of-life insurance which pays out no matter when you die. Because the payout is guaranteed, this type of cover is classed as ‘assurance’ rather than ‘insurance’. That means it’s more costly, but it will give you peace of mind that your beneficiaries’ financial security is taken care of, whatever happens.
It’s worth speaking to a qualified independent financial adviser for some unbiased guidance on all the life insurance options available to you.
Hannah Smith is a freelance financial journalist with a background in the trade press. She writes about personal finance, asset management and business for titles including Money Observer, Shares, FE Trustnet and MoneyWeek.
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