What length of term do I need for my Life Insurance?

What’s the ideal length of time to set my Term Life Insurance for? Is it better to set a longer term on Life Insurance, or can I cut costs by making it shorter? Is a cheaper policy worth the risk of my cover running out?

Question asked by Jeremy Keyes
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Answered by Alicia Hempsted

How Do I Choose the Best Term for my Life Insurance?

Before you decide on your Life Insurance term, you need to ask yourself an important question:

What do you want to cover with your Life Insurance?

How you intend to use your insurnce policy’s payout will affect the type of policy you purchase as well as the length you set it to.

Your Life Insurance term can be the difference between your family getting everything and nothing from your policy.

The following are some of the most common reasons for people to take out Life Insurance policies:

  • To cover their liabilities (e.g. mortgage)
  • To give their children or partner financial support
  • To cover a future Inheritance Tax bill
  • To cover funeral costs.

Term Life Insurance is the most common type of policy that people buy. It’s used typically to cover costs that will be paid off over time, such as a mortgage. Term Insurance is split into Decreasing Term Insurance and Level Term Insurance and is also used to provide financial support for your family while they’re young that ends when they’ll be financially independent.

If your insurance policy is to cover a specific liability, e.g. a mortgage, it makes sense to align the term with a mortgage. If it’s to ensure your family will be taken care of after your death, it makes more sense to align it with when your family will be financially independent.

Whole of Life Insurance, a type of insurance cover that is guaranteed to last for your entire life, is a type of usually used to cover expenses that aren’t going to fall over time, such as funeral costs and IHT tax.

The longer you set your Life Insurance term, the more expensive your premiums will be because you’ll be older when the policy ends, representing a greater risk to insurers.

For that reason, you need to think carefully about a Life Insurance term length that is worth the cost and is able to cover everything you need it to.

 

The Best Term Length for Mortgage Life Insurance

The most obvious length for a Mortgage Life Insurance term is one that covers the term of your mortgage.

The length of a Mortgage Life Insurance term normally matches the duration of your mortgage, but it isn't compulsory.

If your insurance policy runs out before you have finished paying off your mortgage, you are at risk of living your loved ones with significant mortgage debt after your death.

Decreasing Term Life Insurance sees the benefit fall over time alongside a repayment mortgage as the mortgage is paid back. Level Term Life Insurance sees the amount that will be paid out stay fixed over time, making it particularly suitable for an interest-only mortgage or cases where you want to leave more than just your mortgage behind for your loved ones.

 

How to Choose the Term Length for Family Income Benefit

Family Income Benefit could be one of the best ways to support your family’s finances after your death. Rather than giving them a lump sum, it will pay out manageable monthly benefits to keep them on top of their expenses.

Your Family income benefit should be set until your children are self-sufficient

The term of a Family Income Benefit policy covers not only the length of the policy, but also the duration of the payout period.

Because of this, it is common for people to set the term for their policy as slightly longer.

Typically, you would decide on the length of your Life Insurance term with Family Income Benefit to be long enough to support your family until they are able to support themselves, so perhaps until your youngest child reaches 21, for instance.

For parents with this policy, they might set the term to end when their children are old enough to be financially independent.

 

What’s the Right Insurance Term to Protect Fixed Liabilities?

When you pass away, your debts won’t pass away with you. If you have any debts that you have left to repay, they will be taken out of your estate and your loved ones will be stuck with a hefty Inheritance Tax bill.

There are some bills that you just can't get rid of and if you don't pay them, your loved ones may have to.

In addition to paying off Inheritance Tax, your family will need to cover your funeral costs. These can get expensive and difficult to afford if your assets are still going through probate, which is a process that can sometimes take as long as 6 months or longer if you don’t leave a will.

These are the sort of expenses that you would need Whole of Life Insurance to cover. A Whole of Life policy is guaranteed to last until you die, so your loved ones are assured a payout from your insurance policy to help them cover liabilities.

Victoria Slade, Independent Protection Expert at Drewberry Insurance

If you don’t want your insurance payout to be used to pay off your debt, you will need to have it written into trust. By doing this, your insurance payout will bypass inheritance tax and get to your loved ones sooner. That means that they will be able to use your insurance to cover the cost of your funeral.

Victoria Slade
Independent Protection Expert at Drewberry Insurance

 

Beware Reviewable Premiums

While these policies tend to start out with cheaper premiums, the longer you have your policy the more your premiums increase in price. With these policies, your insurer will review and revise your premiums on a regular basis to match your changing circumstances. Long-term insurance policies with reviewable premiums can become very expensive.

 

Sam Barr-Worsfold, independent protection expert at drewberry

We’d always recommend that you choose Life Insurance with guaranteed premiums. While these types of policies may be more expensive initially, they will not change in price, no matter how long you have your policy, which means more often than not they work out cheaper over time.

Sam Barr-Worsfold
Independent Protection Expert at Drewberry

 

Get Expert Advice on Setting Up Your Policy

There is no such thing as an ideal length of term for your Life Insurance. Everyone’s needs and financial situations are different. That’s why the best policy for you will be one that takes your personal circumstances into account.

People need different things from their insurance cover, so not everyone will need to set their policy to be the same length.

Your reasons for taking out insurance will influence the type of policy you choose, the level of cover you set, and the length of your policy’s term. That’s why it helps to speak to a financial adviser.

Tom Conner, Director at Drewberry

Our expert advisers are available to help you find the best insurance policy to match your circumstances. We offer free impartial advice and can pair you with the right insurer to meet your requirements. Contact us today on 01273646484 to receive expert Life Insurance Advice from our advisers.

Tom Conner
Director at Drewberry

Life Insurance
 
Whole of Life Insurance
 
Mortgage Life Insurance
 
Level Term Mortgage Life Insurance
 
Decreasing Term Mortgage Life Insurance
 
Family Income Benefit
 
This information does not constitute financial or other professional advice. You should consult your professional adviser or contact us directly on 02084327333 should you require financial advice. It is important to ensure any insurance policy you take out is suitable for your needs.
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