Term life insurance: what it is and how it works
- New life claims paid in 2024
- 96.5% [8]
- Individual protection claims paid in 2024
- £5.32bn [8]
- Inheritance Tax threshold
- £325,000 [4]
- Cash value at the end of the term
- None
What you need to know before you apply
- It only pays out if you die within the term you choose.
- Level, decreasing and increasing cover suit different needs.
- Your age, health, lifestyle and the amount of cover shape the price.
- Honest answers on your application protect any future claim.
- Writing a policy in trust can change who gets the money, and how quickly.
How term life insurance works
Term life insurance is the simplest kind of life cover. You choose two things: how much money you want the policy to pay, and how many years you want it to last. That period is called the term. If you die during the term, the insurer pays the agreed amount. If you are still alive when the term ends, the policy simply stops and nothing is paid. [1]
In return, you pay a premium, usually every month. As long as you keep paying and the information you gave when you applied was accurate, the cover stays in place. If you stop paying, the cover ends. Unlike some savings or investment products, a term policy has no cash-in value, so there is nothing to get back if you cancel or reach the end of the term. [9]
Because it only pays out in one situation and only for a set time, term cover is usually the most affordable way to buy a large amount of life insurance. That is why many people use it to protect a mortgage or to replace income while their children are growing up. Whole of life insurance, by contrast, is designed to pay out whenever you die, and is typically more expensive for the same amount of cover.
Work out what you want to protect
For example, the mortgage balance, a number of years of family living costs, or both.
Choose a term
Many people match the term to their mortgage, or to the year their youngest child is expected to become financially independent.
Answer the insurer’s questions
You will be asked about your health, lifestyle, job and sometimes your family history.
Pay your premiums
Usually monthly, for as long as the policy runs. The premium is normally fixed at the start for guaranteed-premium policies.
Your family claims if you die during the term
They, or the trustees, contact the insurer with the death certificate and policy details.
The main types of term cover
Term life insurance comes in three main shapes. The difference is what happens to the amount of cover over time. Choosing the right one depends on what the money is for. [9]
| Type | How the payout behaves | Often used for |
|---|---|---|
| Level term | Stays the same for the whole term | Family living costs, interest-only mortgages, general protection |
| Decreasing term | Reduces over the term, roughly in line with a repayment mortgage | Repayment mortgages and other reducing debts |
| Increasing term | Rises over time, by a fixed rate or in line with an inflation measure | Protecting the real value of family income over a long term |
Level term is the most straightforward: if you take out £200,000 of cover for 25 years, the policy pays £200,000 whether you die in year two or year twenty-four. Decreasing term is designed to fall as a repayment mortgage is paid off, which is why it usually costs less. Increasing term aims to stop inflation eating into the value of the payout, and usually costs more as a result.
Decreasing term cover
What works well
- Usually costs less than level cover for the same starting amount.
- Designed to match the falling balance of a repayment mortgage.
What to watch
- It may not clear the mortgage if you remortgage, extend the term or the interest rate is higher than the policy assumes.
- It leaves less for other family costs later in the term.
Some people combine policies, for example a decreasing policy to clear the mortgage and a smaller level policy for family living costs. It is also possible to take out cover on one life or jointly on two lives. A joint policy usually pays out once, on the first death, and then ends. Two single policies cost more but can pay out twice.
What term life insurance can be used for
The payout is a lump sum, and your family can use it however they need to. People commonly want it to cover:
- the outstanding mortgage, so the family can stay in the home
- everyday living costs for a set number of years, replacing lost income
- childcare, school costs or help towards further education
- other debts such as loans or car finance
- funeral costs and the expense of sorting out an estate
Term cover is not designed to pay out if you become ill. Critical illness cover and income protection are separate products that can pay out while you are alive. Some term policies add critical illness cover as an option, which changes both the price and the situations in which the policy pays. [1]
What affects the price
Insurers set premiums by estimating how likely it is that they will have to pay out during the term. They look at your personal circumstances and the cover you ask for. We do not show example prices on this page, because a price is only meaningful once an insurer has assessed your details.
| Factor | Why it matters |
|---|---|
| Age | The older you are when you apply, the more likely a claim is during the term |
| Smoking, including vaping and nicotine replacement | Usually treated as a higher risk, often with noticeably higher premiums |
| Health and medical history | Some conditions may raise the premium, add exclusions or lead to a postponed decision |
| Occupation and hobbies | Hazardous work or activities can increase the risk |
| Amount of cover | More cover means a larger potential payout |
| Length of the term | A longer term covers more years, including older ages |
| Type of cover | Decreasing is usually cheapest; increasing usually costs most |
Premiums can be guaranteed, meaning they stay the same for the whole term, or reviewable, meaning the insurer can change them later. Guaranteed premiums give certainty; reviewable premiums may start lower but can rise. It is worth checking which you are being offered before you agree to a policy.
Working out a starting figure for cover
An illustrative couple with two young children. The figures are round numbers chosen to show the method, not typical amounts or a recommendation.
- Outstanding repayment mortgage
- £180,000
- Five years of family living costs at £20,000 a year
- £100,000
- Funeral and estate costs allowance
- £5,000
- Less savings the family could use
- −£15,000
- Starting figure to discuss
- £270,000
This couple might look at decreasing cover for the mortgage and level cover for the remaining £90,000. Replace every figure with your own before relying on the result.
Applying honestly
When you apply, you will be asked questions about your health and lifestyle. The law in the UK requires you to take reasonable care not to make a misrepresentation when you answer. If you do not, and the insurer would have offered different terms had it known the truth, it can reduce a claim, change the policy or, in serious cases, refuse the claim and cancel the policy. [2]
Industry figures show most life claims are paid. The Association of British Insurers reported that 96.5% of new individual life claims were paid in 2024, and that the most common reasons for declined protection claims were non-disclosure of pre-existing medical conditions or not meeting policy definitions. [8] [10]
| Point | Value |
|---|---|
| Whole of life | 99.99% |
| Term life | 96.5% |
| Critical illness | 89.7% |
| Income protection | 80% |
Insurers selling in the UK must follow the Financial Conduct Authority’s insurance conduct rules, which cover how policies are sold and how claims are handled. [6]
Who receives the money
If a policy is not written in trust, the payout normally goes into your estate. That means it may be delayed until probate is sorted out, and it can count towards the value of the estate for Inheritance Tax. [3]
The Inheritance Tax nil-rate band is £325,000, with a residence nil-rate band of £175,000 that can apply when a home is left to direct descendants. The government has fixed these thresholds up to and including the 2030 to 2031 tax year. The standard rate on the part of an estate above the threshold is 40%. [4] [3]
Writing a policy in trust means the payout goes to trustees you choose, who then pass it to the beneficiaries. This can let money reach your family without waiting for probate and can keep it outside your estate. Trusts have their own tax rules, so the right type depends on your circumstances. [5]
How claims work
When someone dies, the family, executor or trustees contact the insurer. The insurer will usually ask for the death certificate, the policy details and information about the person’s medical history. Once the insurer is satisfied the claim is valid, it pays the amount due to the estate or the trustees.
If a claim is refused or you are unhappy with how it was handled, you should complain to the insurer first. If you are still unhappy, you can usually take the complaint to the Financial Ombudsman Service, which is free to use. [7]
Most families come to term cover because it is straightforward: a fixed amount of protection, for a set period, at a price they can plan around. It protects the years when people are relying on you most.
Common questions
Do I get my money back if I outlive the term?
No. Term life insurance has no cash-in or savings value. If you are still alive when the term ends, the policy stops and nothing is paid, and the premiums you paid are not returned. That is the trade-off that keeps term cover more affordable than whole of life insurance, which is designed to pay out whenever you die. Many people are comfortable with this, because the cover did its job: it protected their family during the years they were most financially exposed, such as while paying a mortgage or raising children. If you want cover that is certain to pay out, whole of life insurance is the product to look at, though it usually costs considerably more for the same amount.
How long should a term life policy last?
The term usually matches the period during which people depend on you financially. Common choices are the remaining years on your mortgage, or the number of years until your youngest child is expected to be financially independent. Some people choose the later of the two. A longer term covers you for more years, including at older ages, so it usually costs more each month. A term that is too short can leave your family without protection at a time they still need it. It is sensible to think about when your biggest financial commitments will end, and to review your cover if your circumstances change, for example if you move home, remortgage or have another child.
Is the payout from term life insurance taxed?
The payout itself is not normally subject to Income Tax or Capital Gains Tax. However, if the policy is not written in trust, the money usually becomes part of your estate, and the estate may have to pay Inheritance Tax on the value above the available threshold. The nil-rate band is £325,000 and the standard rate above it is 40%, although other allowances and exemptions, such as leaving everything to a spouse or civil partner, can apply. Writing a policy in trust can often keep the payout outside your estate. Because tax rules depend on individual circumstances, it is worth checking the official guidance or taking professional advice about your own situation.[3]
Can I cancel a term life policy?
Yes. You can normally cancel at any time by telling the insurer and stopping your payments, and the cover ends when you do. Protection policies sold in the UK normally come with a cancellation period after you take them out, during which you can cancel and receive a refund of premiums paid. After that period, cancelling ends the cover but you will not usually get anything back, because term policies have no cash value. Before cancelling, think about whether anyone still relies on the cover. If you are cancelling to replace one policy with another, it is usually safer to make sure the new cover is in place before the old policy stops.[6]
Do I have to have a medical to get term life insurance?
Many people are accepted on the basis of their answers to the application questions alone, without a medical examination. Depending on your age, the amount of cover you ask for and your answers, an insurer may ask for more information. That could be a report from your GP, a phone interview with a nurse, or occasionally a medical check or tests. This is a normal part of underwriting and does not mean you will be refused. What matters most is that you answer every question honestly and fully, because the insurer relies on those answers when it decides whether to pay a claim. If you are unsure about a question, ask before you submit your application.
What happens if a claim is turned down?
If an insurer declines a claim, it should explain why in writing. The first step is to raise a complaint with the insurer, setting out why you think the decision is wrong and including any supporting information. The insurer must follow a complaints process. If you are unhappy with the final response, or the insurer has not replied within the required time, you can usually take the complaint to the Financial Ombudsman Service. The service is free for consumers, independent, and can order the insurer to put things right if it finds the decision unfair. Keeping copies of the application, the policy documents and all letters makes a complaint easier to pursue.[7]
Related guides
Sources
- MoneyHelper — What is life insurance? (2026-09-28)
- legislation.gov.uk — Consumer Insurance (Disclosure and Representations) Act 2012 (2012-03-08)
- GOV.UK — How Inheritance Tax works: thresholds, rules and allowances (2026-09-28)
- HM Revenue & Customs — Inheritance Tax — thresholds (2025-11-26)
- HM Revenue & Customs — Trusts and Inheritance Tax (2010-11-08)
- Financial Conduct Authority — Insurance: Conduct of Business sourcebook (ICOBS) (2026-09-28)
- Financial Ombudsman Service — Financial Ombudsman Service (2026-09-28)
- Health & Protection (reporting ABI and GRiD figures) — Protection sector pays record £8bn in claims but approval rates slip (2025-07-14)
- Aviva — Level term vs decreasing term life insurance (2024-08-20)
- Money Marketing (reporting ABI and GRiD figures) — Insurers paid record £8bn in claims in 2024 (2025-07-14)