Term insurance is the simplest, cheapest, no-frills form of life insurance. Pay a monthly premium for a set amount of cover for a fixed number of years (the "term"). The policy then pays out a lump sum if you die during that period. If it expires and you are still alive, there's no payout. So why buy it and how much does it cost?
There are various types. One of the most common is "level" term insurance, where the lump is set at the start and stays the same throughout the term.
Protecting your mortgage
You can also buy a so-called "decreasing" term policy, which is usually cheaper as the amount to be paid on death reduces over the course of the term. These are often bought to cover a mortgage, which also decreases over time as the capital is paid off. Couples taking out a mortgage will often buy a "joint life" policy designed to pay off the loan should either die.
How much
Premium costs vary depending on the type, length of the term, age and whether you smoke. For a non-smoking couple, both aged 30 next birthday, for example, a £100,000 25-year joint life policy taken out to protect the mortgage, is competitively priced at £7.39 per month from Aviva.
As a guide, quotes from online broker Moneysupermarket.com show that a 24-year-old non-smoker wanting £200,000 of level cover over 21 years could get it for £7.03 a month from insurer Beagle Street, whereas a 24-year-old smoker would have to pay a minimum of £9.29 a month for the same cover. And minimum monthly premiums for a 34-year-old smoker wanting the same cover would shoot up to £18.20.
Not everyone needs it
Single people with no dependants are unlikely to need it because no one is going to suffer financially if they die. Similarly, a working couple with no children might feel there is no need if each partner could survive financially without the other. But if you have children or other dependants, you should consider it to protect them if you die. The exception might be if you are an employee with "death in service" benefits, which would pay out typically three or four times your salary to your partner. If you feel secure about your employment, you may also feel buying separate life cover is unnecessary.
Where to buy
Insurance providers charge widely differing premiums, so it's really important to shop around.
If you know what cover you want and simply want to find the cheapest, useful online brokers include Moneysupermarket.com, Confused.com and uSwitch.com. If you are unsure and need more help, specialist brokers such as LifeSearch (lifesearch.co.uk) and Life Assure Online (lifeassureonline.co.uk) also offer free independent telephone advice.
Confident buyers who know what they want may be able to save more money by buying through an online fee-based discount broker such as Cavendish Online cavendishonline.co.uk. Term insurance premiums normally include a broker/adviser commission. Cavendish is different in that it gives up all its commission reducing premiums accordingly, and charges a one-off £35 fee instead. In most cases, savings on the reduced premium more than repay the fee within a year.
Save by switching
You can switch providers whenever you want – just like you change your car or home insurer – to get a better deal. Chances are, if you bought a policy in recent years and your health has not deteriorated, you will find the same cover at a cheaper price if you shop around. So review your term cover periodically and get quotes to see if you can cut your existing premium by switching. You should be able to cancel your existing policy without penalty - but don't do so until you have arranged a new one in its place.
Family income benefit
A variant is a "family income benefit" (FIB) policy, which pays out an index-linked income for a set period after the death of the policyholder, rather than a one-off lump sum.
This can be more appropriate for someone who has just lost their partner and has children, because they are sure of a regular income and do not have to worry about investing a lump sum.
FIB is generally cheaper because the overall payout decreases and therefore the risk to the insurer is less. A 25-year, index-linked FIB of £20,000 a year for a non-smoker, aged 30 next birthday, is cheapest with Scottish Provident at £14.44 a month, according to Life Assure Online.
