What type of term insurance do I need?

Term assurance in its simplest form is one of the basic types of life assurance; whilst there are a lot of different variations to this type of policy they all have similarities.

They pay out a sum of money when the event covered occurs. This may be death, or diagnosis of a terminal or critical illness. It only pays out if the event happens within a stated period of time known as the term.

There are various forms as stated above, the first being a level term assurance policy. This type of policy has the sum assured amount constant throughout. You can usually take this cover out for a minimum of 1 year with a maximum age of 85. No surrender value is payable on these policies and once the sum assured and term have been selected they can not usually be altered.

The premiums can be guaranteed to remain the same throughout the policy term or they can be reviewable and could go up with the insurance provider’s mortality experience.

This type of life insurance is cheap and easy to understand.

Terminal Illness cover is normally provided as a benefit with these policies. This is where there is a high probability that an illness confirmed by a doctor will cause death within 12 months. If this benefit is included in the policy then the insurance provider will pay out the sum assured early to enable the person covered by the policy to start to put their affairs in order.

This benefit under current legislation and Inland Revenue regulations is paid tax free.

Decreasing term assurance is a popular way to cover an outstanding mortgage debt. The sum assured decreases each year by a stated amount, so at the end of the term the amount of cover will be nil.

The reduction can be either a fixed or variable amount but although the cover reduces the premiums normally remain the same. Because the insurance providers risk decreases each year this is normally one of the cheapest forms of life cover.

It is normally used to cover a mortgage on a repayment basis and the cover goes down together with the amount owed to the mortgage lender. However if the amount of decrease chosen at the outset of the policy decreases faster than the capital owed on the loan then if a claim is made there may be a shortfall.

Decreasing term assurance can also be of value in Inheritance Tax planning the term for these policies is usually 7 years and the sum assured covers the amount of Inheritance Tax that would be payable on a lifetime gift. This may mean the gift can be made without possible reduction as a result of this tax becoming payable.

These policies are called Inter Vivos Term Assurance Policies

Term assurance policies can also increase, this increase is usually linked to the retail price index or a fixed percentage each year. The premium normally goes up each time the sum assured is increased.

If the life insurance policy is being used to protect dependants then this ensures that the benefits keep pace with inflation.

If in doubt as to which policy you need, seek independent advice.