Term Assurance

This is the simplest of life assurance policies that is suitable for a variety of needs.

The sum assured (the amount of insurance purchased) can be paid on death or critical illness. Some life assurance policies may allow you to add or remove benefits at a later stage, this is an important feature that caters for changing circumstances removing the need to cancel and start again. Cheaper policies will not have this feature (you do not have to pay much more for this flexibility and if you have multiple policies it can work out cheaper overall). 

Term assurance policies can be level (the sum assured will not change), decreasing (the sum assured will decrease by a certain amount each month) or increasing (the sum assured will increase each year in line with inflation or a fixed rate agreed at the outset).

Term assurance comes with guaranteed or reviewable rates, this applies to the premium payable. If the policy is guaranteed then the premium will never change. A reviewable policy is usually reviewed every 5 years and the premium could go up or down depending on the claims experience of the life assurance provider.

A term assurance policy will provide no benefit once the term has expired and it will have no cash-in value at any time.

Policies can be written on a single life or joint life basis. If joint life is chosen then the sum assured will be paid should either of the lives assured die or suffer a critical illness (if critical illness has been selected). The policy will usually come to an end once a claim has been made, so it is common to insure lives separately, in which case a flexible policy as described above may offer better value.

Uses for Term Assurance

Decreasing: most commonly used to repay a capital & interest mortgage on death because the balance of the mortgage will reduce after each mortgage payment. The rate at which the policy decreases is calculated at the outset but broadly speaking as long as interest rates do not exceed 9%, or for some policies 12% then the sum assured should always be sufficient to repay the mortgage.

Level: suitable for interest only mortgages and other debts (e.g. inheritance tax). May also be used to provide a lump sum which could be invested to provide an income for dependants (also consider family income benefit) or when critical illness is chosen to provide funds to make alterations to a home in the case of disability or to provide funds to obtain specialist treatments or, again, to be invested to provide an income.

Increasing: provides a degree of protection against inflation. Commonly used where the sum assured is required to fund school fees which can increase significantly each year.

Where to buy term assurance

You can buy term assurance from high street retailers or an independent financial adviser. Retailers tend to offer basic, low cost policies from one insurance provider without providing any advice - if you know exactly what you want then this may be the cheapest route. Cheap is not always best.

An independent financial adviser will consider your needs, select the most suitable policy from an array of insurance providers taking into account financial strength of the insurer, cost, and most importantly the benefits and small print of each provider's policy. An IFA will also advise on the use of trusts which ensure benefits are paid promptly and to the right the person which could save thousands of pounds in tax when used properly - this is particularly important if you have not made a will.

Talk to us for your life assurance needs, we are Independent Financial Advisers.