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What is term life insurance?

What is a term life insurance policy?

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Written by  Alicia Hempsted
15 min read
Updated: 25 Jan 2024

Term life insurance policies will give you life cover for a limited time. In this guide, we'll outline how term life insurance policies work and whether a term policy is right for you.

What is the definition of term insurance? 

A term insurance policy is an insurance policy that covers a limited period of time. Once a policy has reached the end of its term, you can no longer make a claim on it and your cover will end. 

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How does term life insurance work? 

When you take out a term life insurance policy, either you or your insurance provider will set the end date of your policy. If you pass away during the term of your policy, your loved ones will receive a pay-out. After that, your policy will end. 

If you are still alive when you reach the end of your policy’s term, your life insurance policy will end, and you will no longer have life insurance cover. If no claim is made during the term of your policy, you will not receive a refund of the premiums you paid while your policy was active. 

Some providers will allow you to extend the term of your policy or convert it to a whole of life policy, but this will depend on the provider and the type of life insurance policy you have taken out. 

You can find out more about how life insurance works generally from our guide ‘How does life insurance work?’ 

What are the different types of term life insurance? 

There are four term life insurance types for you to choose from. Each of the different types determines how your policy’s pay-out and premiums behave over time – whether they increase, decrease, or stay the same. 

Level 

Level term life policies offer an unchanging level of cover from the start to the end of your policy. So, no matter when a claim is made on your life insurance, the pay-out will be the same as it was when you first took out your policy. 

This type of term life insurance is thought to be the most reliable because you always know how much your beneficiaries will receive. It tends to be a more affordable option if you want to leave a monetary gift to your loved ones.  

However, it is important to keep in mind that the overall value of your life insurance benefit may decrease over time due to inflation. This means that if you base your pay-out amount on existing debts and loans, your loved ones may not be able to pay off the full amount of their debt when they claim. 

Decreasing 

Decreasing term policies have a pay-out that decreases over time. The end of your policy’s term is usually set so that your policy ends when your pay-out has been decreased to zero. 

This type of mortgage life insurance policy is normally used to cover mortgage debt. Policy owners can set the rate of decrease of their life insurance to match the rate of a repayment mortgage so that their insurance pay-out will always be able to cover the remaining cost of their mortgage.  

Increasing 

Increasing term life insurance, also known as index-linked life insurance, will increase in cover over time. This increase is normally set to match the rate of inflation. By doing this, you can preserve the value of your life insurance pay-out and prevent your policy from depreciating over time.  

This type of policy is more expensive than other types but can be a good option if you are concerned that your life insurance won’t be able to cover important debts or give your loved ones sufficient support. 

Family income benefit 

This is a unique type of term life insurance that works differently to the others. Rather than paying your beneficiaries with a lump sum, this term life insurance type will pay out in monthly increments up until the end of your policy’s term. For a limited time, it can provide a monthly income, making it a good option if you want your life insurance to be used primarily to give financial support to your loved ones.  

How long is a life insurance term? 

You can decide on the term of your life insurance when you take out your policy. Every provider has a minimum term for their policies, which can start as low as 1 to 2 years for some providers. However, most policies have a grace period at the start before you can make a claim, which can range from as low as a month to 12 months after your policy is purchased. Full details about this no-claims period will be outlined in your policy documents. 

When it comes to the maximum term for a life insurance policy, it really depends on your provider and the type of policy you choose. Maximum terms can range from 20 years to as much as 50 years from some providers. However, some policies may also have an upper age limit to your cover, which can limit your policy’s term. 

If you have a decreasing life insurance policy, your policy’s term will also be determined by the total cost of your mortgage and your repayment rate. By doing this, you can have your life insurance policy end to match the date thar your mortgage is paid off. 

What does term life insurance cost? 

Life insurance can start at as little as £3.78 a month1 when buying through MoneySupermarket. However, the cost of life insurance is not the same for everyone and will depend on a number of factors: 

Age 

As you get older your risk of health problems increases, so insurance providers will normally increase the cost of life insurance as you get older.  

Medical history 

Having pre-existing medical conditions can increase the cost of life insurance. However, providers won’t always look at the entirety of your medical history when you apply for your policy. Some may only take note of health problems you’ve had in the last few years and that period to decide on the price of your policy.  

Lifestyle 

Having a high-risk lifestyle can affect the cost of life insurance. Cigarettes and alcohol can have serious consequences for your health, so insurance providers are likely to add to the cost of your policy if you are a smoker or regularly drink alcohol.  

Occupation 

Some occupations come with greater risks than others. If you have an especially dangerous job or one that may affect your health in the long term, insurance providers will add to the cost of your policy. 

1Based on £100,000 worth of level term cover for a 30 year-old non-smoker with no pre-existing medical conditions over a 20 year period (December 2023)

Term insurance vs whole of life 

The alternative to a term life insurance policy would be a whole of life insurance policy. This is a life insurance type that has no end and guarantees a pay-out, regardless of when you die. However, it isn’t as perfect as it sounds. There are some pros and cons to whole of life insurance that makes it a good option for some, but not everyone.  

Term life

Whole of life

Cheaper, with the cheapest option being decreasing cover

Expensive, with the cheapest option being level cover

Active for only a limited time

Lasts for the rest of your life

If you survive your policy's term, your beneficiaries will not receive a pay-out

Guaranteed to pay out, no matter when you pass away

You can choose increasing, decreasing, or level cover

You can choose level cover or have your policy linked to an investment fund with the potential to increase based on returns

Term policies can also cover terminal illnesses and critical illness cover can be added

Most providers don't offer critical illness cover and policies do not usually cover terminal illness

Ultimately, most people that choose whole of life insurance choose this type of policy because they want to cover long-term financial obligations. For example, they might want to help their loved ones cover the cost of their funeral or ensure that loved ones in need of care can continue to afford it.  

At MoneySuperMarket we can help you compare quotes for term life insurance policies. 

Should I get term life insurance? 

There are many reasons why you might need life insurance, and the reasons you have can help you decide which type of life insurance policy is right for you.  

If you want to protect your loved ones from temporary financial burdens, like paying off debts or financially supporting young children, then it may be worthwhile to choose a term life insurance policy over a whole of life. Doing so can save you money on your policy.  

When it comes to the type of term life insurance you need, it can depend on your circumstances and your reasons for purchasing insurance. 

Compare term life insurance quotes online

At MoneySuperMarket, we can help you find a great deal on a term life insurance policy by collecting quotes from top UK life insurance providers. By answering a couple of questions for us, we can fetch quotes for policies that match your requirements and help you find great value for the cover you need. 

Compare term life insurance quotes online today in just a few easy steps, with no pressure to complete an application until you’re absolutely ready to buy. 

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