Types of term assurance
Level term insurance
Being ‘level’ your premiums won’t change during the lifetime of the policy and neither will the sum assured (the amount paid out if you die). You will specify how much cover you want and for how long. The premiums are set for the lifetime of the policy.
Who does it suit?
People who want to protect fixed debts that will have to repay a fixed lump sum at the end of their mortgage term, such as interest only mortgages.
Decreasing term insurance
Also known as mortgage protection insurance, with decreasing terms, the premiums you pay remain the same, but the cover reduces slowly during the term of your policy, dropping off steeply at the end. You specify how long you want the life insurance policy for and the starting sum assured (the amount your dependants receive if you die).
Who does it suit?
Typically, decreasing term policies are taken out by people on repayment mortgages, as they pay off capital and interest over the mortgage term, reducing the amount owed over time, until it reaches zero. Your decreasing term insurance policy will gradually reduce at the same pace.
Premiums on these policies tend to be cheaper than level term protection.
Convertible term insurance
When the original policy term ends, with Convertible Term Assurance you have the option to convert a policy into a whole of life assurance policy or an endowment policy. The advantage is you cannot be refused a policy, regardless of your current health status. However, when converting, you cannot increase the sum assured and you must do it before the term of your existing policy ends.
The costs to convert make this a slightly more costly option, with premiums averaging 10% more than basic level term insurance. Premiums at conversion stage are set by age and gender.
Escalating term insurance
With these policies, the sums insured are lower when you are younger, but rise over time. Premiums ‘escalate’ in line with the sum insured increases.
Family income benefit
Family income benefit insurance is taken out for a set term. If you were to die during this time, instead of paying a lump sum, it will pay your dependants an agreed tax-free income until the policy term expires.
You will specify the level of income you want your family to receive tax-free, possibly equivalent to your monthly salary, and how long you want protection for. Policies are usually written on a joint basis, with the surviving spouse or partner benefiting. If you die with one year of the policy remaining then the policy will pay the set monthly income for one year.
Who does it suit?
It suits families with young dependent children, to reflect the financial commitments until they’re self-sufficient. A regular income rather than lump sum may alleviate the pressure of apportioning money for the remaining term for the surviving partner.
What is term assurance?