What is Term Life Insurance?

Full Definition

Term life insurance is a life insurance policy that pays a lump sum (or, in some variants, a regular income) to the policyholder's beneficiaries if the policyholder dies within a fixed, pre-agreed term, such as 10, 20 or 25 years, or up to a specific age. If the policyholder is still alive at the end of the term, the policy simply ends with no payout and no cash value, which is why term life insurance is generally the cheapest form of life cover -- unlike whole-of-life insurance, which guarantees a payout whenever death occurs (in exchange for meaningfully higher premiums), term insurance is pure protection against the risk of dying within a specific, defined window rather than also functioning as a savings or investment vehicle. The two most common structures are level term insurance, where the sum insured stays the same throughout the term regardless of when a claim is made, commonly used to provide a fixed lump sum for dependants or to clear an interest-only mortgage, and decreasing term insurance, where the sum insured reduces over time, broadly tracking the falling balance of a repayment mortgage, making it a cheaper option specifically designed to pay off an outstanding mortgage balance if the policyholder dies before it is repaid. Premiums depend heavily on age, health, smoking status, the sum insured and the length of the term, and a life insurance payout is normally free of Income Tax and Capital Gains Tax for the recipient, though if the policy is not written in an appropriate trust, the payout can form part of the deceased's estate for Inheritance Tax purposes -- writing a term life policy in trust is a common and inexpensive way to keep the payout outside the estate and ensure it reaches beneficiaries quickly, without waiting for probate.

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