Important Financial Decisions

The term life insurance is a bit of a misnomer and the product is more properly referred to as life assurance or term assurance. Insurance, after all, is a form of protection against something that may not happen (such as a fire or theft) whereas assurance refers to a certainty, which death still is.

Sticking with the term life insurance, its purpose is to provide a financial sum in the event of the policy holder's death. This may be intended as income replacement, to clear a mortgage, pay ongoing expenses or simply to provide a lump sum. Whatever the purpose, circumstances often change while the insurance is in place and so there are different types of policy to reflect this.

Policies may provide whole life insurance, meaning that benefits will be payable whenever the policy holder dies as long as premium payments are maintained. Such policies may have non-profit forms, where premiums and benefits are fixed, or with profit versions that may have profits added to the basic sum assured.

The alternative is to take out term assurance that applies for a fixed period, with no benefits being payable if the policy holder is still alive at the end of the period. This type of policy will be cheaper than whole life cover and recognises that financial commitments, such as mortgage repayments and school fees, will end at some time. Level term assurance guarantees to pay a fixed sum on death while decreasing term cover reduces the amount payable over time. This is suitable for mortgage protection cover where the amount owed gradually reduces.

Renewable term insurance can be renewed on the expiry date with no health review needed while convertible term is level term insurance that can be converted to whole life or endowment insurance at the end of the term. Increasing term insurance is intended to counter the effects of inflation and so increases the amount of benefit by a set rate each year. Index linked term insurance is similar but each year's increase may be linked to the Retail Price Index or similar measure rather than being a fixed amount. All forms may be available on a single or joint life basis.