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Guide

Term life insurance explained

Find out what term life insurance means, how it works and who it’s best suited to.

What does term life insurance mean?

Term life insurance is a type of insurance policy that covers you for a fixed period of time or ‘term’ of years. If you’re diagnosed with a terminal illness, or die within the fixed term, your family receive a cash lump sum. 

Premiums for term life insurance are calculated on age and general health. The older you are, the more expensive your premiums will be. This is because the chances of you falling ill or dying increase with age. Premiums will also be more expensive if you smoke.

If you become terminally ill or die during the policy term, your family can make a claim. They would need to contact your life insurance provider. 

To make a claim, they would need the following documents:

• Claimant’s name
• Claim details, e.g. cause of death
• Claimant’s GP or consultant details.

Your insurer may also need further information. For example proof of ID,  bank details and a death certificate.

Term life versus whole of life insurance

Term life insurance is more affordable as the insurer covers you for a certain period of time.

Whole of life insurance guarantees a payout on death. It's usually more expensive because you’re covered for your entire life.

Why choose term life insurance?

Term life insurance can protect you over a fixed term for large expenses, like a mortgage or a car. It’s also there to protect your family after you're gone. For example, if you die, your family can continue paying off the mortgage.

Your family can use the payout as they like, it's not restricted to paying off loans.

What term life insurance should I get?

There are three different types of term life insurance. Each type suits different individual needs and circumstances. For instance, do you have dependants that you want to protect? Do you have debt that needs paying off if you were to die? Answering these questions will help you pick the right type of term life insurance.

The three types of term life insurance:

1. Decreasing term insurance

This is typically used to protect mortgage repayments. The amount you're covered for decreases in line with your remaining mortgage amount.

The cash lump sum reduces over the fixed term.

People choose this option when they want protection for a repayment mortgage. 

They choose a decreasing term because their repayments reduce over the mortgage period. 

Decreasing term insurance is cheaper than level term insurance (below). This is because the amount of cover reduces every year. 

Graph showing how decreasing term life insurance works. As the amount of cover decreases over time to zero, your premiums stays the same.

2. Level term insurance

The cover amount stays the same over the fixed term.

People also choose level term insurance when they want a guaranteed lump sum. This can cover childcare costs, for example.

Graph showing how level term life insurance works. As the amount of cover you need stays the same over the years, your premiums also stay the same.

3. Increasing term insurance

The cash lump sum increases over the fixed term.

People choose this option when they want their payout to cover the future cost of goods. The cost of goods could increase with inflation in the economy.

They choose an increasing term because they want their cash lump sum to be worth the same in the future.
Graph showing how increasing term life insurance works. Over time, the amount of cover goes up, so do the monthly premiums.

In addition to life insurance, there are also other types of cover for  illness and injury:

• Serious and critical illness cover - covers you against serious illnesses. It gives you a cash lump sum while you recover, but does not payout if you die
• Income protection insurance - covers you if you fall ill or get injured and can’t work. It gives you a monthly payment to help cover your life expenses.


Does term life insurance have a cash value?

No, term life insurance does not have a cash value.

Your family (the beneficiary) would only receive a payout if you died within the covered fixed term.

If you want a guaranteed payout, you should consider a whole of life insurance plan.

What happens when term life insurance expires?

When your term life insurance plan expires, your monthly payments to the insurer stop. You are then no longer covered.

If you don’t get diagnosed with a terminal illness or do not die within the fixed term, you do not receive a payout.

Contact your life insurer or financial adviser to see what options they provide.
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Is term life insurance taxable?

In most scenarios, term life insurance is not subject to tax.

But, there are some scenarios where the beneficiary may become liable for tax:

• On any interest gained on the lump sum between the death of the plan holder and the payout
• If the payment is part of the deceased’s estate, inheritance tax would need to be paid above the IHT threshold.

Read the Government’s help sheet on Gains on UK life insurance policies for all the latest tax advice.

Find out more about our term life insurance.

Relevant guides and articles

  • Whole of life insurance 

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    Unlike term life insurance, whole of life insurance covers you for your lifetime. Learn more about whole of life insurance in our guide.

    Whole of life insurance explained

  • Mortgage protection insurance 

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    Mortgage protection is a type of term life insurance designed to pay off your mortgage. Read our guide to help decide if it's a good option for you and your family.

    Mortgage protection insurance explained

  • Serious and critical illness cover

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    Serious and critical illness cover pays out a lump sum to you if you’re diagnosed with a serious illness. It’s common to add on this option to a life insurance plan. Learn more about how it works, what illnesses it covers, and more in our guide

    Serious and critical illness cover explained