Level term life insurance | Term insurance

What is level term life insurance?

Level term life insurance plans cover a set period, typically up to 20 years, with a fixed payout.

What this means essentially, is that if you take out a level term or term assurance policy over 15 years, the payout upon death will be the same whether it’s two months or almost 15 years in.

Level term life insurance vs life assurance

However, unlike whole life assurance policies, you’re not guaranteed to make a claim as death is not necessarily inevitable over the course of your term’s years and your premiums will not be paid back to you or your beneficiaries.

If your term expires without a claim, then you may consider it a loss, but your assets and payment plans will have been protected and, of course, you’ll still be alive.

The fixed time frame and payout can make level term life insurance slightly more flexible but not without risks, especially if you still require life cover once the term is over.

Who is level term life insurance for?

Level term life insurance is generally taken up as cover while paying off a specific debt over the same amount of time.

For example, you may have a plan in place to repay your mortgage over the next 20 years, so taking out life insurance over the same period could protect your loved ones from having to deal with the remaining bills in the event of your death.

If you know exactly how much cover your beneficiaries will need, level term life insurance provides peace of mind that the payout won’t change at any point during the policy’s period.

It’s worth thinking about how much insurance you will need because, while your debts might be in the region of, say, £10,000, taking out cover for the same amount might be unnecessary.

Planning is key to making a level term life insurance policy work for you.

Disadvantages of level term life insurance

There is a risk that midway through your term’s policy you will not need the same level of cover you required at the beginning.

For instance, after five years of paying off a 10-year debt of £10,000, your policy’s cover of £8,000 might feel like too much, and thus the premiums you were paying could have been excessive.

By the same token, however, if you died two years into that policy, then that £8,000 cover would have been worth it.

You will need to weigh up how much your peace of mind is worth against what you would reasonably need to cover your debts should you die.

It’s also important to note that once a term in your insurance policy is over, be it decreasing or level term, insurers will ask you to reapply if you wish to extend the cover.

If you do want cover beyond the initial term then there is a risk that your premiums will be higher. So you'll need to work out the length of the term you will require in advance.

A simple way of doing this is lining up the length of the term with the length of your debt repayment plan. If it's a 20-year mortgage repayment, then take out a term life insurance policy for 20 years.

If it's a level term policy, then you may only want to get a 10-year policy for a 20-year mortgage, depending on the final payout. This can help reduce your premiums overall.

Age and any other changing circumstances that were not affected during the term will also be taken into consideration again when applying for a new term. This makes the planning for the length of your term’s policy really important.

Decreasing term v level term life insurance

Decreasing term life insurance policies attempt to solve the problem of having too much cover, especially for those paying off standard repayment mortgages.

As a term life insurance, this policy follows the level term’s principles of fixed timescales, but instead of having a consistent level of cover, the payout decreases, ideally to coincide with your decreasing repayments.

Consumers tend to opt for a combination of the two policies to meet their life insurance requirements but level term provides an added safety net especially for those paying off interest-only mortgages.

If you are paying an interest-only mortgage, you will need to have saved up some capital in case the sale of the property does not cover the full cost. In these cases, a level term life insurance policy may work out better, but it all comes down to your individual circumstances.

With a decreasing term life insurance policy, you can assess much easier the length you will need the insurance for, especially if you have a set number of years to pay your debts off in.

For example, if you know it will take you 20 years to pay off your mortgage, then a 20-year decreasing term life insurance policy will work out about right in terms of convenience.

This is because in the policy's 19th year, for example, you will not need the same level of cover that you get in the 1st year of the policy.

However, the cost of your premiums may be more expensive with a decreasing term life insurance policy than with level term cover, as it's likely you'll need to have more years covered.

Essentially, a level term life insurance policy has more flexibility in deciding how much you want to pay and allows you a little more opportunity to make a calculated risk.

Decreasing term cover is usually the safer bet, but also comes with its own risk that you may accumulate further debts than when you originally signed up for the policy.

*Based on £150,000 of level-term cover for 25 years for a 30-year-old non-smoking male with no pre-existing medical conditions (March 2023)

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