Level term life insurance

There are a number of different types of life insurance. Which one suits you best depends on your personal and family circumstances, as well as your aims in taking out this kind of policy.

In general, life insurance is a policy that pays out a cash lump sum when you die. Life cover can be split, into two main types – term life insurance and whole life insurance.

Term life insurance is further split into level term and decreasing term life cover. With so many types to choose from, it can be confusing to know which is best.

Let’s take a look at level term life insurance, what it means and how it could be useful.

What is level term life insurance?

Level term life insurance is a policy that remains in force for a pre-agreed period of time – the term of the policy.

Generally speaking, this kind of cover is aimed at providing peace of mind to people who have financial commitments, for example, covering the cost of a mortgage, a spouse and young children. The payout from a term life insurance policy could help the surviving partner cover the cost of household bills, housing and raising children.

The reason for having this cover in place for a fixed period is that the insurance is likely only needed until the mortgage is paid off. Or, perhaps, until any children have grown up and left home. As such, many level term life insurance policies are taken out for 20 or 25 years, mirroring the term of the mortgage.

This in contrast to whole-of-life insurance. This kind of policy applies from the time it’s set up until the holder dies – provided that they continue to pay monthly premiums. It’s more commonly used by older people to provide a lump sum on their death to cover the likes of funeral expenses or inheritance tax bills. 

What’s the difference between level term and decreasing term life insurance?

One of the big decisions to make is whether to opt for a fixed level of payout during the course of the policy, or whether to go for a decreasing amount.

With level term insurance, the amount your life is insured for in the first year of the policy is the same as in all subsequent years. So on a 25-year policy for £200,000, if you die at any point in that 25-year period, your dependants get £200,000 – regardless of how long the cover has left to run.

This would allow them to:

• Pay off outstanding debts
• Pay for funeral costs
• Maintain their standard of living without your income

With decreasing term life insurance, on the other hand, the potential payout falls every year. So for example, while your dependents would get £200,000 if you in the first year the policy was active, they might get £100,000 if the death came halfway through the term.

This is because in many cases the size of a family’s financial commitment falls over time as their mortgage – typically their biggest outgoing – is paid off. This is why decreasing term life insurance is often referred to as mortgage life insurance. It’s primarily designed to pay off a jointly-held mortgage in the event that one partner dies.

Similarly, mortgage life insurance is often held by both partners, especially if they’re jointly responsible for making monthly repayments.

One other important difference between level and decreasing term insurance is that the latter is likely to be less expensive, assuming the same starting level of cover. This is because the value of the decreasing life insurance falls over time.

Should I get level term or decreasing life insurance?

So how can you work out which type of life insurance is best for you? The decision depends to a large degree on what you want your insurance to cover.

If you’re happy for it simply to reflect the outstanding balance on your mortgage, decreasing life insurance might be worth considering.

There are significant benefits to signing up for a policy that pays a certain amount of money to your surviving family members in the event of your death.

After all, your mortgage isn’t your only financial commitment. There are also ongoing household bills and of course the cost of raising children. Many parents might like to be able to help their kids pay for higher education or take their first steps on the property ladder.

If you died relatively late in the term of a decreasing life insurance policy, these goals may be difficult to achieve.

Of course, the cost of a policy is another important factor to bear in mind. Other things being equal, decreasing term insurance tends to be cheaper than level term life insurance given the same initial level of potential payout.

You should also think about the impact of inflation on the cover you’re paying for. Even though level term life insurance promises to pay a fixed amount, the real value of this amount could fall over time due to inflation. So while your mortgage might be covered, other costs that your surviving family members face could have risen.

Can I get level term life insurance with no fixed term?

Level term life insurance – as the name suggests – is designed to run over a pre-agreed period of time, for example 20 or 25 years. If you want a policy that offers a certain level of payout whenever you die, you should look at whole-of-life insurance. 

Bear in mind that this type of insurance is likely to be more expensive due to the fact that insurers will have to pay out at some point. With term insurance, many policies don’t end up being paid out. Not because the insurer has rejected a claim, but because the policyholder lives past the end of the term.

How much level term life insurance should I take out?

There are a number of factors to consider when deciding what the right level of cover is. Obviously, the amount you can afford to pay for insurance every month is one factor. Although, term insurance might often be less expensive than you think, and should be cheaper the earlier in life you take out a policy.

In some cases, you might decide to set the level of cover equal to the outstanding balance on your mortgage. Or you might decide to pay for additional cover to give your family a greater level of protection. 

You might also need to consider any other debts that need to be covered, as well as the cost of your children’s upbringing and education.

To help get an idea of how much cover you need, use our life insurance calculator.

You should be able to increase the amount of cover at a later date. For example if you take out a bigger mortgage or the size of your family increases. However, this usually leads to higher monthly premiums.

Will I get taxed on my level term life insurance payout?

Life insurance payouts aren’t normally subject to tax such as income tax or capital gains tax. However, a lump sum from a life insurance policy could be subject to inheritance tax in some circumstances.

Under current rules, any money or assets left by one spouse or civil partner to another aren’t subject to inheritance tax. But if you want to leave your life insurance payment to someone else, some or all of it could be taxed at 40% if the value of your estate exceeds the current £325,000 threshold. By writing your life insurance policy in trust, you might avoid it being subject to inheritance tax. But I’s vital that you seek expert legal advice on this matter.

How can I get a level term life insurance policy quote?

We can help you there.

To compare level term life insurance quotes, you simply need to provide some personal information so providers can assess the level of risk.

This information includes:

• Your age
• Your profession
• Where you live
• Your past and current state of health
• Any family history of illness
• Your lifestyle
• Whether you drink alcohol
• Whether you smoke

You could be asked to have a medical examination if an insurer needs more information.

Bear in mind that your insurer could turn down a life insurance claim if you’ve failed to disclose relevant information, such as a pre-existing health condition.

You also need to say how much cover you want, and what period of time you want the policy to be in place for.