Term life insurance is one of the most popular and affordable forms of life cover in the UK. It provides financial protection for a fixed period and pays out a lump sum if the policyholder dies during the term. For families with mortgages, dependants or outstanding debts, term life insurance offers essential financial security at relatively low monthly cost.
This guide explains how term life insurance works, how much it costs, and how to choose the right level of cover for your needs.
Contents
What Is Term Life Insurance?
Term life insurance provides cover for a specified number of years, commonly 10, 20, 25 or 30 years. If you die within the policy term, the insurer pays a tax-free lump sum to your beneficiaries. If you outlive the policy term, no payout is made and the cover ends.
It is designed to protect financial responsibilities that reduce or end over time, such as mortgages and childcare costs.
Types of Term Life Insurance
Level Term Insurance
The payout amount remains fixed throughout the term. This is suitable for protecting family income or covering interest-only mortgages.
Decreasing Term Insurance
The payout reduces over time, typically in line with a repayment mortgage balance. Premiums are usually lower than level term policies.
Increasing Term Insurance
The payout increases annually to help offset inflation. Premiums generally rise over time.
Choosing the right structure depends on your financial commitments and long-term planning goals.
What Does Term Life Insurance Cover?
Standard policies typically cover:
- Death due to illness
- Death due to accident
- Terminal illness diagnosis during the policy term in many cases
The payout can be used to:
- Repay a mortgage
- Replace lost household income
- Cover childcare and education costs
- Pay off debts and loans
- Cover funeral expenses
What Is Not Covered?
Common exclusions include:
- Non-disclosure of medical history
- Fraudulent claims
- Specific high-risk activities not disclosed at application
Careful and honest disclosure during underwriting is essential.
How Much Does Term Life Insurance Cost?
Premiums depend on:
- Age
- Health status
- Smoking history
- Occupation
- Cover amount
- Policy term length
As a broad example, a healthy non-smoker in their 30s may secure £250,000 of level term cover for 25 years from approximately £10–£25 per month. Costs increase with age and health risks.
Applying earlier in life generally results in lower premiums.
How Much Cover Do You Need?
When calculating cover, consider:
- Outstanding mortgage balance
- Household income replacement needs
- Number and age of dependants
- Existing debts
- Future education costs
A common approach is to insure between 8 and 12 times annual income, though individual circumstances vary.
Single vs Joint Term Life Insurance
Single Policy
Covers one individual and pays out once if that person dies during the term.
Joint Policy
Covers two people but usually pays out only once on first death. Often used by couples covering shared financial commitments.
While joint policies may reduce cost, two separate policies can offer greater flexibility.
Adding Critical Illness Cover
Many UK insurers offer critical illness cover as an optional add-on. This pays a lump sum if you are diagnosed with a specified serious illness during the policy term.
Adding this feature increases premiums but broadens financial protection.
When Is Term Life Insurance Worth It?
Term life insurance is particularly valuable if you:
- Have a repayment mortgage
- Support children or dependants
- Are the primary income earner
- Have significant financial liabilities
It may be less essential if you have no dependants or outstanding debts.
Writing Your Policy in Trust
Placing a term life insurance policy in trust can:
- Speed up payout to beneficiaries
- Keep the payout outside your estate for inheritance tax purposes in many cases
- Ensure funds go directly to chosen recipients
Professional advice is recommended before setting up a trust.
Common Mistakes to Avoid
- Underestimating required cover amount
- Choosing too short a policy term
- Failing to disclose medical history
- Not reviewing cover after major life events
- Allowing policies to lapse due to missed payments
Regular review ensures your policy continues to match your circumstances.
Term Life Insurance vs Whole Life Insurance
- Term insurance is lower cost and time-limited.
- Whole life insurance provides lifelong cover with guaranteed payout.
- Term insurance suits temporary financial obligations.
- Whole life policies are often used for estate planning.
The appropriate option depends on whether you require temporary or permanent cover.
Frequently Asked Questions About Term Life Insurance
Does term life insurance pay out if I survive the policy term?
No. Standard term policies do not provide a payout if you outlive the term.
Can I extend my term life policy?
Some insurers allow extensions or policy conversion, but terms vary.
Is the payout taxable?
Life insurance payouts are usually tax-free, though inheritance tax may apply if not written in trust.
Final Thoughts
Term life insurance remains one of the most cost-effective ways to protect your family’s financial future in the UK. It provides targeted cover for defined financial responsibilities and offers flexibility across policy structures.
Before selecting a policy, compare multiple insurers, assess your financial commitments carefully and review your cover regularly. A well-chosen term life policy can provide significant peace of mind at a manageable monthly cost.