If you have dependants, you likely have several expenses in order to cover bills and living costs. How would they cope financially in the event of your death? This is where a life policy comes in.
At its most basic, life insurance is designed to pay out a sum of money after you die.
This ensures that your dependants are able to keep up with bill payments, maintain their standard of living and pay for funeral costs after you've gone.
One of the most common types of cover for this is a policy that pays out if you die within a fixed period of time.
This is known as term life insurance.
If you die after this pre-agreed time-frame (called a term), you will not receive a payout.
For this reason, term life policies tend to have lower premiums than those that cover you for the whole of your life.
Those looking to protect their family’s finances by covering living expenses or replacing lost income may opt for a level term life insurance policy.
How does it work?
Level term policies are easy to understand. You set the length of the policy term (e.g. 25 years) and the amount of cover (e.g. £100,000).
If you were to die at any point during that 25-year period, the payout would be £100,000.
So, if you die within a year of buying the policy, the amount paid would be the same as it would if you died a year before the policy was due to expire.
How is it different from mortgage life insurance?
If you’re looking for something specifically to cover your mortgage (which is possibly the largest of your outstanding debts), you might be interested in a decreasing term policy.
This is more commonly known as mortgage life insurance.
Mortgage life insurance is commonly used to cover the outstanding balance of a repayment mortgage.
As you make more repayments to your mortgage, the overall level of debt decreases over time. As such, the level of cover you’ll need also decreases.
With mortgage life cover, the amount you’re covered for decreases over the term of the policy.
So if you died two years after buying the policy, your payout would be higher than if you died 20 years afterwards.
If this sounds like it may suit your needs, read our guide to mortgage life insurance for more information.
Things to keep in mind
Since level term life insurance policies don’t change their payout over time, it’s important to think about how much cover you need before buying.
You can use our life insurance calculator to work out your existing debts and expenses to get a better idea of how much life cover you need.
Don’t forget that your circumstances may change over time. For example, you might initially buy a policy with a certain level of cover because you've just had a child.
By the time they've grown up and left home, you might not need as much cover.
It’s worth reassessing your circumstances every now and again to make sure you’re not under-insuring yourself or overpaying on your policy.