What is term life insurance, and how much does it cost?

A term life insurance policy can be a cost-effective way to ensure your family will benefit from financial protection if something happens to you.

However, it's important to understand how it works and exactly what it does – and doesn't – cover.

What is term life insurance?

Life insurance is designed to give you peace of mind so if something happens to you, your loved ones will receive a lump sum to help manage the family finances.

Term life insurance covers you for a specific amount of time – essentially, the policy's term.

The length of the term can vary to suit your particular circumstances.

You can also choose from two different types of term life insurance: decreasing term insurance and level term insurance.

How does term life insurance work?

You pay regular premiums on a monthly or annual basis, and, in return, the life insurance company promises to pay out a cash sum if you die while the policy is active, as long as you meet all of its terms and conditions.

Depending on what you want your life insurance to cover, decreasing term or level term are two types of term life insurance to consider.

Decreasing term life insurance

With this type of policy, the amount of cover decreases over time and is often used to cover a debt that will reduce over a set period, such as a repayment mortgage.

The premiums you pay on a decreasing term insurance policy will be cheaper compared to a level term policy and remain the same throughout its duration.

Still, the pay-out you get will be less each year the policy runs too.

With decreasing cover, your policy's value will gradually reduce over the policy term until it reaches £0.

Usually, the value of this sort of policy is set to reach £0 simultaneously as a repayment loan or mortgage is due to be repaid.

Level term life insurance

This runs for a fixed period – such as five, ten or 25 years – and only pays out if you die during the time the policy is active.

Level term insurance is useful if you want to guarantee that your loved ones get a fixed lump sum of money, so they're supported if you die.

Unless you make changes to your policy, your premiums will stay the same.

However, because level term insurance gives you the security of a fixed sum of money, premiums tend to be higher than decreasing term life insurance policies.

How the pay-outs compare

For example, if you set up a 20-year policy with £50,000 worth of cover, here's an illustration of how the pay-out could change over time depending on the policy you choose:

What does term life insurance cover?

With term insurance, you're only getting cover for a specific period.

While the policy is running, it will pay out to help your dependents if something happens to you.

Therefore, it's suitable for people who want to cover large loans such as a mortgage and put protection in place to help with the costs of raising a family until the children are ready to leave home.

Your beneficiaries can use the lump sum from level term life insurance in all manner of ways, such as:

• To cover a mortgage
• Pay off personal loans and debts
• Pay for your funeral
• Pay for school or university fees
• Pay for everyday living expenses
• As a nest egg

If you think you need additional cover, there are various options to consider, including:

• Life insurance with critical illness cover ­– Some life insurance companies will cover you if you die or are diagnosed with a terminal illness (with a life expectancy of fewer than 12 months) during the policy's term. With some policies, you can add this on as an extra

• Increasing term insurance – Over time, the price of everything goes up, known as inflation. Level term policies don't take inflation into account, so the pay-out amount might seem more than adequate when you take out the policy, but 20 years on, it might be worth a lot less in real terms. If you'd like your cover to take inflation into account, you can opt for this as part of your level cover policy

• Over 50s life insurance – This is available for everyone aged 50 to 80 and doesn't require any medical questions or assessments. Premiums are usually fixed and will stop at the age of 85 or 90, with cover continuing for the whole of the policy holder's life, paying out on death. This may be an option to choose when a term policy comes to an end

• Funeral cover – This pays out a lump sum when you die specifically to cover your funeral expenses

What does term life insurance not cover?

Life insurance policies have no cash in value at any time and, if your payments stop, so does your cover.

If you don't die within the policy term, you and your family won't receive anything.

If you want to continue to have life insurance security, you'll need to take out a new policy.

Life insurance is designed to pay out in the event of your death.

If you can't provide for your family because of illness or disability, you won't be covered.

It's also important to realise that you won't see a penny of the money you pay into the policy – unless you're diagnosed with a critical illness.

This is included in your cover, or you add this on to your policy.

Most policies have some exclusions. For example, they might not pay out if you die due to drug or alcohol abuse, and you normally have to pay extra to be covered if you take part in risky sports or have a high-risk job.

If you have a serious health problem when you take out the policy, your insurance might exclude any cause of death related to that illness.

How much does term-life-insurance usually cost?

Life insurance can be very good value, often starting from just a few pence a day, particularly if you take it out when you're young.

Other things that will affect how much your premiums will cost include: 

• Your age
• Your height and weight
• If you smoke
• Your lifestyle – including how much you drink
• Your medical history

Industry research suggests that the average costs for level term insurance range from £3.72 for a 20 year old non-smoker to £66.24 for a 50 year old smoker.

When you apply for your life insurance, you'll also have to consider:

• How long you want your insurance to last – the term of the policy
• The minimum amount of cover you'd like
• Whether you want to opt for decreasing, level or increasing term insurance

Because level term insurance gives you the security of a fixed sum of money, premiums will usually be higher than decreasing term life insurance policies.

Typically, the younger you are when you buy this type of cover, the cheaper it's likely to be.

How can I get the best deal on a term-life-insurance policy?

As with most things, it pays to shop around.

It's also important to be clear about what you want your policy to cover, how long you want the cover, and how much it will pay out.

Taking out too much life insurance could mean that your premiums might be higher than you need to pay.

On the other hand, underestimating the cover you need means your family might not be left with enough money in the future.

Consider these questions: What payments will they need to cover? How much will they need to live comfortably? Will their own ability to earn be affected if you die?

It's best to get cover as soon as you need it – it's more expensive the older you get.

For instance, level term cover of £200,000 over 25 years for a 30-year-old starts at just under £7 per month, with this premium remaining fixed for the entire term.

The same cover for a 45-year-old rises to £23.70 a month.

Term life insurance vs whole life insurance: which is better?

Whole life term insurance ensures that no matter when you die, your loved ones will receive a lump sum pay-out from your insurer, as long as you keep up with your premium payments.

This is in contrast to term life insurance, which only guarantees that there will be a pay-out should you die within the policy's specified term.

There's no lump sum payable at the end of the policy term.

Term life insurance plans are much more affordable than whole life insurance.

This is because the term life policy has no cash value unless you pass away while the policy is active.

If something happens to you during the term of the policy, it will pay out, and your family will be taken care of.

Whole life term insurance is generally a more expensive form of life cover because insurers know they will definitely have to pay out some money at some point.

Because there are so many factors to consider, it can help to speak to an independent financial adviser.

You can discuss all the key points with them to determine the type and amount of cover you need.

Learn more: term vs whole life insurance, which is better?

How is term life insurance paid out?

A life insurance pay-out is a sum of money that is paid out when the policyholder dies while covered by the policy.

The beneficiary should contact their insurance provider as soon as possible after the insured person's death and will need to have all the documentation to support their claim.

The life insurance claims process has three basic stages:

1. Notification

This is when you first contact the provider to start the life insurance claims process.

The beneficiary will need the policy number; the life insured's doctor's contact details, information about who they are and their relationship with the insured person.

2. Assessment

Usually, a claim form will need to be completed and returned to the insurer.

Depending on the type of claim, they may ask for more information, such as a death certificate.

3. Pay-out

When all the paperwork is completed, payment is made to the named beneficiary.

Many financial advisers specialise in life insurance. Talk to yours about the best value policy for you.

Get expert financial advice

Term life insurance offers a cost-effective way to secure financial protection for your loved ones, with premiums varying based on factors like age, health, and lifestyle.

Whether you choose decreasing or level term coverage, it's essential to evaluate your needs and budget to find the best policy for you. With options available for different situations, term life insurance can provide peace of mind and financial stability for your family, both now and in the future.

Unbiased will match you with a qualified mortgage broker who can help you find the best term life insurance policy tailored to your financial needs and goals.