# Term life insurance explained

> Insurance · Last updated 4 July 2026

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## Quick answer

Term life insurance pays a lump sum if you die within the policy term — level term keeps payout fixed, decreasing term matches mortgage balance and costs less.

Life cover protects dependants who rely on your income if you die during the policy term. FCA-regulated advisers and brokers must recommend suitable cover for your circumstances. This guide explains the main policy types and why writing a policy in trust can help your family.

## Key facts

- Level term pays same sum whether you die in year one or year twenty of the policy
- Decreasing term payout falls roughly with repayment mortgage balance — cheaper premiums
- Writing in trust keeps proceeds outside your estate for faster payout and IHT efficiency
- Premiums depend on age, health, smoking status and cover amount — compare guaranteed vs reviewable

## How much cover

A common rule of thumb is ten times your salary plus outstanding debts, but dependants, childcare costs and funeral expenses all need a personal calculation. A couple with young children may need more cover than the salary multiple alone suggests.

Dual-income couples often insure both lives even when one partner earns less. Replacing childcare and household work has a real cost that a lower salary figure does not capture.

## Medical underwriting

The application asks detailed health and lifestyle questions, and non-disclosure can void a claim later even if you die from an unrelated condition. Answer honestly and declare pre-existing conditions as requested.

Some policies exclude pre-existing conditions or charge higher premiums for higher-risk applicants. Read the exclusions carefully before you sign, as cheaper cover may leave gaps where you need protection most.

## Trusts and tax

Putting a policy in trust names beneficiaries directly, which avoids probate delay and may keep proceeds outside your estate for inheritance tax purposes. This is especially useful if your estate is near the nil-rate band.

Mortgage lenders may require decreasing term cover assigned to them until the loan is repaid. Check whether your lender insists on this before arranging a separate policy in trust.

## Frequently asked questions

### Is life insurance taxable?

Payouts are usually free of income tax for beneficiaries. Inheritance tax may apply if the policy is not written in trust and your total estate exceeds the available thresholds.

### Can I cancel if I pay off mortgage?

Yes — decreasing term cover linked to a mortgage may no longer be needed once the loan is cleared. Consider keeping level term cover if you still have dependants who rely on your income.

### Does terminal illness cover differ?

Many policies pay out early if you receive a terminal diagnosis with less than twelve months to live. Check the policy wording, as definitions and time limits vary between insurers.

## Primary source

https://www.gov.uk/consumer-protection-rights

## Related

- [Life insurance basics](https://moneyguide.org.uk/insurance/life-insurance-basics/)
- [Term life vs whole-of-life compared](https://moneyguide.org.uk/compare/term-life-vs-whole-of-life-insurance/)
- [Income protection vs critical illness](https://moneyguide.org.uk/insurance/income-protection-vs-critical-illness/)
- [Inheritance tax explained](https://moneyguide.org.uk/benefits-tax/inheritance-tax-explained/)

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Independent UK money guidance from [Money Guide](https://moneyguide.org.uk). Information only — not regulated financial advice.