What Length of Term Do I Need for My Life Insurance?

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 insurance policy’s payout will affect the type of policy you purchase as well as the length you set it to.

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 as long as you keep paying premiums, is a type of Life Insurance usually used to cover expenses that aren’t going to fall over time, such as funeral costs and IHT tax.

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.

If your insurance policy runs out before you have finished paying off your mortgage, you are at risk of leaving 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.

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.

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.

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.

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.