What is term insurance?
Term insurance is the simplest and usually the cheapest kind of life insurance. You choose a length of time, called the "term", and you are covered for exactly that period. If you die during the term, it pays out a lump sum. If you outlive the term, the cover simply ends and nothing is paid.
Think of it like insuring your car for a year. You are covered while the policy runs, and if nothing happens, the cover just expires. Because most people do not die during a typical term, insurers can offer this cover cheaply.
The main types of term cover
- Level term. The payout stays the same throughout, for example £250,000 for 25 years. Good for covering a fixed debt or leaving a set amount behind.
- Decreasing term. The payout falls over time, roughly in line with a repayment mortgage. Often the cheapest option, and popular for covering a home loan.
- Increasing term. The payout rises over time, usually to keep pace with inflation, so its real value does not shrink.
Why people choose it
Term insurance suits a particular stretch of life: the years when you have big financial responsibilities but have not yet built up savings to cover them. A common example is a young family with a mortgage and children at home. You take out cover to match the mortgage or until the children are grown, and once that need passes, you no longer need the policy.
How it compares to whole of life
The key difference is simple. Term insurance covers a fixed period and is cheaper. Whole of life covers you until you die, whenever that is, and costs more because a payout is effectively guaranteed. If your goal is protecting your family during your working years, term is often the natural fit. If your goal is leaving a guaranteed sum behind, for example to help with an inheritance tax bill, whole of life may suit better.
The tax step to remember
Whichever term policy you choose, ask whether it can be written "in trust". Doing so usually keeps the payout out of your estate, so it is not caught by inheritance tax and reaches your family faster. It normally costs nothing to set up. An independent, FCA-regulated adviser can help you pick the right type of term and set it up properly.
Information only. This is general information, not financial, tax or legal advice, and not a personal recommendation. Tax rules depend on your circumstances and can change. Please speak to a qualified, FCA-regulated adviser before acting.