What is term life insurance?
Life insurance is one way to help ensure that your family will be financially protected after you die. People purchase life insurance for a number of different reasons. The final payout could help your family to:
- Pay off a mortgage.
- Settle any bills or outstanding debts.
- Pay tuition fees and any other education costs.
- Support themselves financially during an otherwise difficult time.
When you buy term life insurance you can decide how long you want cover for - for example five, ten or fifteen years. This time period is referred to as the "term." If the policy reaches the end of the agreed term without paying out, it will expire.
How much does it cost?
As with all life insurance policies, the cost depends on a number of different factors. There are personal factors - for example, the cost of life insurance usually increases as you get older. It can cost more for men because women live longer on average. If you have a dangerous occupation, you are a smoker or you have/had any relevant medical conditions you may also have to pay more.
It also depends on the kind of policy you choose. Two main kinds of term life insurance are:
Level term life insurance
This may be what automatically comes to mind when you hear people talk about "life insurance." With this kind of policy you can decide how much you want your family to receive for a successful claim. This will depend on their needs as well as how much you are willing to pay per month. As a rule, the more you pay each month, the more your family will receive if you die. However, the policy will only successfully pay out if all the terms and conditions have been met, so make sure you are clear on all the rules before you commit to anything.
Decreasing term life insurance
Decreasing term policies usually appeal to people who have a good idea about their family's financial future. These kinds of policies usually cost less per month because the amount your family could receive actually decreases as the policy continues. This may seem a little unusual, but it can make sense under some circumstances. Certain financial milestones can greatly affect how much your family will need in the future. For example, many people take out life insurance to ensure the family could pay off a mortgage or support their children. You may be able to predict a point in the future when you will have paid your mortgage off or your children will become financially independent. Once these financial responsibilities are gone your family would need less money from your insurer. It doesn't make any sense to pay high monthly premiums for money that will not be needed. You can plan for your cover to decrease gradually along with the size of your mortgage and other payments.
Investing in life insurance is a big decision. Once you start paying in to your policy many insurers will not give you any money back if you decide to cancel. You must also meet all of the terms and conditions to guarantee a final payment. It is therefore important to find the right policy for your individual needs. Talking to an expert could help you understand the details.
Image © iStockPhotos / Courtney Keating
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