Term life insurance

Single cover: it can be bought to protect one person, this means if you pass away during the policy term, your insurance company will pay a lump sum.

Joint cover: this covers you and your partner. Your insurance company will make a lump sum payment on the first death i.e. only one payment is made and it is paid when the first person passes away during the policy term.

Dual cover: you can also buy dual cover, which covers you and your partner. Your insurance company will make a lump sum payment if you pass away and another lump sum payment if your partner passes away during the policy term.

You may need term life insurance if:

• Your family or others rely on you for financial or other support, for example, they rely on you for your salary, or the work you do in the home or family business.
• You have any loans or debts that your family could not pay if you died. Bear in mind you may already have mortgage protection insurance for your mortgage.
• You act as a guarantor on a mortgage for someone.

If you have a young family, you will need more life cover than if your children are older, because the benefit will have to last longer.

You need to consider buying enough insurance to:

• Give your family an income for as long as they need it
• Pay off your loans or mortgage (you may already have mortgage protection insurance for your mortgage)
• Cover bigger costs that might arise in the future, such as college expenses for your children

You may not need term life insurance, or you may need less cover if:

• No-one depends on your income or work
• You have death-in-service benefits through your job or pension plan
• You have enough money for your dependants to live on if you die
• Your dependants could live comfortably on any social welfare benefits they would get if you died
• You have investments or property that could provide an income or be sold
• Your family is grown up and financially independent
• Your partner is earning enough money to support themselves (and any dependants)

If you arrange a policy on your own life, the benefit is paid directly to your estate, or to whoever you have named as the beneficiary, once the insurer has received proof of your death. If your spouse or partner takes out a policy on your life, the benefit could be paid to them without going to your estate. If you have a joint term life policy, the benefit is usually paid to the surviving policyholder named on the policy.

You must decide:

• The amount of cover you want paid out on your death, known as the ‘sum assured’ or ‘policy benefit’.
• How long you want cover for, known as the ‘term’. If you have a young family, you may want to put life insurance in place until your youngest child has left school or college. This could mean having a policy with a 20 or 25 year term. You could also get insurance for a five or 10 year term, if your family is older. If you want cover that will pay out regardless of when you die, you will need whole of life insurance. The amount of cover and the term are both fixed for the life of the policy, as is the premium, or the amount you pay for the policy, unless you buy index-linked insurance.
• The type of cover you want. The standard premium usually covers terminal illness as well as death, but check with your provider. This means that the policy will pay out a proportion, usually around 80%, of the policy benefit if you are diagnosed with a terminal illness (this is not the same as serious illness or critical illness cover). The remaining benefit is then paid out when you die. An advantage of this cover is that you get most of the benefit in advance which could help pay for any medical costs you have to pay.

What details do you need to give?

You will have to fill in an application form, called a ‘proposal’. This asks you for details such as your medical history, your lifestyle (your job, hobbies, drinking and smoking habits), the name of your doctor, your family’s medical history and other details. The insurance company may contact your doctor to get a report about your health, depending on your age and the type and value of the policy you want to take out.

It is the responsibility of the insurance company to ask the relevant questions in the application process so that all the information required is received through these answers. The questions must be in plain intelligible language. The consumer is required to answer fully and honestly all the questions set out in the application process. If you do not, your policy may not be valid and your dependants may be unable to make a claim.

Will you need to have a medical examination?

Insurance companies will not usually ask you to have a medical examination unless you have a history of illness or health issues such as a high BMI, you are over a certain age, or you are applying for a large amount of cover on a term life insurance policy.

If a medical examination is required, a comprehensive questionnaire will be sent to your GP to enable the insurance company to get a full view of your health. Some of the information that will be requested includes:

• Family history of any illnesses
• Your medical history
• Lifestyle factors that could impact your health i.e. smoking, drinking etc.
• Physical health

Policy restrictions

Generally, term policies will not pay out if your death is caused by a medical condition that you were aware of when you first applied for cover but you did not disclose, or your death is caused by suicide within the first year or two of the policy.

The amount of your premium usually depends on the amount and term of your insurance and the type of policy you want.

Factors that could affect the price include:

• Age: premiums are higher the older you are when taking out a policy, as the risk of death increases with age
• Smoking: premiums for smokers can be as much as double the cost for non-smokers due to an increased risk of smokers dying younger
• Current and past health: if you have a medical condition or have a family history of certain illnesses such as cancer, stroke, heart issues or early death, you usually pay a higher premium
• Work and lifestyle: your premium may be increased if your work or lifestyle interests are likely to put you at a greater risk of dying early or suddenly such as working on building sites or mountain climbing
• The term of the policy: the longer the term you are insured for, the more expensive the policy will be.

Most people who apply for insurance are accepted at normal policy rates. However, sometimes an insurer will charge a higher premium than normal, called a ‘premium loading’. This could be because they feel there is a higher risk of you making a claim, for example, for medical reasons. Occasionally an insurer may postpone giving you insurance until they know the outcome of a medical procedure you are about to have. In some cases, an insurer may refuse to insure you because they consider the risk of you making a claim is too high.

You may be able to add extra benefits to a basic term policy for an extra cost. These benefits could include:

• Serious illness cover: if you add this cover to your term life policy, it means you could make a claim during the term of the policy if you were diagnosed with one of the serious illnesses covered. The illnesses typically covered are usually very serious, such as cancer, a heart attack or stroke. Read more about adding serious illness cover to your life insurance.
• Index-linking: this means the amount you are covered for increases in line with inflation each year. Typically, your cover rises by between 3% and 5% to keep up with inflation. Inflation would, over time, reduce the value of any money paid to your dependants so your premium goes up each year to pay for it. Many policies are index-linked automatically, so if you do not want your policy to be indexed, tell the insurance company when you are taking out the policy. If you do not index link your policy your cover and premium will remain the same throughout the policy term.
• A conversion option: this option lets you convert your policy into a new policy before the end of the term without having to prove that you are then in good health. The premium for the new policy will be based on your age when you convert the policy. Usually, you have to be under 60 or 65 to convert your policy. It means you will be able to continue your life cover when you are older, in return for paying a slightly higher premium now.

There may be other policy benefits available in addition to those listed above. Always read the policy terms and conditions and ask how much extra you will pay for extra benefits.

Term life insurance benefit is paid out as a tax-free lump sum. However, anyone who inherits the money after your death, depending on their relationship to you, may have to pay inheritance tax. How much tax they pay depends on how much they inherit and Revenue rules at the time of your death. You can buy a specific type of life insurance policy, called a Section 72 policy, to provide a tax-free lump sum to cover any inheritance tax liabilities that your beneficiaries may have when you die.

If you stop paying premiums, your policy will automatically lapse after 30 days. Once a policy has lapsed, you are no longer covered. Some companies will let you re-start the policy if it has lapsed for only a short time and you are prepared to pay all the premiums you have missed and sign a declaration saying you are in good health. However, if your policy has lapsed for more than a few months, you may have to take out a new policy. As you would be older than when you first applied, the premium may be higher and you may need to provide new evidence of your state of health. If your health has deteriorated, you may not be able to get a new policy.

Term life insurance policies are not changed as often as general insurances such as home and car, but it is still important to review your policies to ensure that the cover is appropriate for your needs and circumstances at any given time.

What cover do you need?

If your circumstances change, it is important to review your level of cover, the benefits and the cost.

Reasons why you might want to change your term life insurance policy

You may have:

• Experienced changes in your life. For example, if you have children or have taken out additional loans
• Bought a new home
• Made a change to your mortgage repayments or find yourself in arrears. In these circumstances, you should contact your insurance provider as soon as possible to inform them of any changes in your mortgage repayments and see if this has any impact on your policy
• Let your original policy lapse

How much will a new policy cost?

The cost of term life insurance depends on a number of factors including the amount of cover you need and how long you want cover for. Risk factors increase the cost, including your age, whether you smoke and your health and lifestyle. Read more about the factors that affect the cost of life insurance.

Tips if you are going to change your term life insurance cover

• Consider getting financial advice
• Try not to cancel existing life insurance policies to take out new ones, unless you have a good reason
• Make sure you know what questions to ask your provider
• Always give full and accurate information when completing application forms
• Don’t give false or inaccurate information because you may have difficulties if you need to make a complaint or claim later on
• Read your policy details to check what you are covered for and what your policy excludes. Policies often have exclusions or restrictions, as well as terms and conditions you must meet to make your claim

Switching your term life insurance?

It can be more expensive to take out a term life insurance policy as you get older, so bear this in mind if you are considering switching.

Switching your term life insurance should be relatively straightforward if it is not assigned to your mortgage lender to pay off your mortgage if you die. However, if your current policy is assigned to your lender you must:

• Notify your lender that you are intending to switch
• Agree the new policy with your lender, as they will need to accept this new policy before releasing the original policy
• Ensure the new policy is assigned legally to your lender, by way of a Deed of Assignment. Your life insurer/lender will assist you

If you switch to a new life insurance policy, you will need to cancel your old policy in writing, but you should not do this until you have confirmation that the new policy is in place.

Making a life insurance claim involves some paperwork. There are a number of basic steps you should follow:

• Contact the deceased person’s insurance company or broker first (or their employer if it is an employee benefits package) to find out what paperwork is required. You may be required to provide proof that you are next of kin or the executor of the estate.
• Find out what you are entitled to: you may not always know what sort of life insurance policies a spouse or family member had, particularly if they were members of a group scheme. Review credit card and bank statements and contact lenders and the deceased person’s employer to learn about any additional cover he or she may have had.
• Get your paperwork in order – you may be required to provide documentation to the insurance company such as the original policy document, death certificate, will, grant of probate or letters of administration for the claim to be processed. If you are unable to provide original documentation contact the insurer or broker to find out if any alternative documentation can be used.

Pay outs

If you arrange a policy on your own life, your life assurance company pays the policy benefit into your estate when they receive proof of your death. If a policy is taken out on your life by your spouse or partner, they can make a claim for the policy benefit without it first going through your estate.