Term Life Insurance payout options

When you buy life insurance you’ll be faced with a lot of options, some of which may be confusing, especially to people who are considering life insurance for the first time. The choice between term life insurance and whole life insurance is usually settled by the price, but once you’ve chosen term life insurance working out which policy to buy can be a little confusing.

If you go simply on the price you will overlook some policies which may cost a little more, but that will pay out more money at certain points of the policy, and it’s important to understand the payout options of the term life insurance policies before you rush into a decision.

Traditionally customers would buy a life insurance policy, say for £100,000 worth of cover, and over a 25 year period. If they died a year into the policy their family would get £100,000, and if they died a year from the end of their policy, their family would get £100,000. This is a standard flat rate pay out, and is one of the most common on life insurance policies.

There were customers who questioned the need for this level of cover towards the end of the policy. The whole point of life insurance after all is to offer customers protection when they need it the most. Whilst that customer may have needed £100,000 worth of cover at the beginning of the policy, by the end they may have paid off their mortgage, the children may have left home and their need for that much money may have gone.

As a result they created reducing term life insurance, which is cheaper on a monthly basis. On a reducing term policy the further through the policy you live, the less money you leave behind. It’s a lot cheaper than a flat rate policy because as the risk to the insurer grows as you get older, the amount of money they could have to pay out get’s lower.

On top of these two main payout options you may also be given the option to have your family receive the money as a lump sum payment, or on a monthly basis over a certain number of years, effectively replicating getting your salary every month.

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