Level term life insurance

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What is level term life insurance?

Level term life insurance is a type of life insurance that runs for a set period of time. This set period is known as your ‘term’ and can be anything from 5 to 40 years. Longer terms may be available, but 40 years is the maximum we compare.

The ‘level’ in level term refers to your pay-out, which remains the same amount throughout your term. So, if you die in year 5 of your policy, your pay-out will be the same as if you die in year 30.

You choose how long you want your term to be when you buy a policy. You’ll also choose your cover amount - this is how much your policy will pay out if you pass away.

If you die during your term, your loved ones will receive your cover amount as a cash lump sum.

What does level term life insurance include?

Like all life insurance policies, level term life insurance will pay out if you die in a way that’s covered by your policy, as long as it happens during the time you’re covered. This includes death from illnesses developed during your term, as well as fatal accidents.

What isn’t covered with level term life insurance?

There are a few things life insurance typically won’t cover:

  • Death due to alcohol or drug abuse
  • Death due to reckless acts
  • Suicide or death due to self-inflicted injury

Your insurer might have their own exclusions, so it’s worth checking what these are before taking out a policy. Try our guide on life insurance exclusions for a deeper look at what isn’t included.

What can my level term life insurance pay-out be used for?

Your pay-out goes to your beneficiaries and can be used however they see fit. Most people choose to use it to:

  • Pay off a mortgage allowing them to keep their home, and take some of the financial strain off losing a partner
  • Support their children, ensuring their standard of living remains high in the absence of a second income
  • Act as inheritance for the deceased’s loved ones, especially if they have no savings of their own
  • Clear debts to ensure their partner isn’t left paying debts they can’t afford

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Is life insurance taxable?

The pay-out from your level term policy is only taxable if it pushes your estate to more than £325,000. Your estate is the sum total of everything you leave behind after you’re gone. If this exceeds £325,000, you’ll pay 40% tax on anything above that threshold. If it’s under £325,000 you pay no tax.

If you’re worried your pay-out may push your estate far above the £325,000 cut off, think about writing your life insurance in trust. Here your pay-out is ring-fenced, and kept separate to your estate, meaning you won’t pay tax on it. This can be useful for ensuring your loved ones get your whole pay-out, rather than just part of it. 

Level term life insurance

How much level term life insurance do I need?

Before you take out a policy, it’s worth thinking about how much cover you want.

Most people take out enough cover to ensure their loved ones could carry on living comfortably if they were to pass away. So it’s a good idea to figure out how much this is for you.

To settle on the right amount, you’ll need to think about:

  • Your outgoings such as bills, food, and general living expenses. Think about how much your family would need to support themselves without your income, and factor this into your cover amount.
  • Your mortgage, think about how much you have left to pay, and whether you want your cover amount to clear the rest of your mortgage if you were to pass away before it had been paid. As a mortgage is usually a household’s largest bill, ensuring you take out enough cover to pay it off should the worst happen is an easy way to make sure your family would be financially secure if you died.
  • Inheritance and whether you want your pay-out to act as inheritance. If you do, factor this into your cover amount.
  • Debts you have to clear. Taking these into account is a good way to ensure your family aren’t left with repayments they can’t afford.

How long do I need cover for?

Once you’ve settled on a cover amount, you’ll need to think about how long you want your level term policy to last.

If you have a mortgage, and want your pay-out to clear it, you could tie your policy length to the remaining years left on your mortgage. This way, you’d know it’d be paid no matter when you died.

If you have a young family, it’s worth thinking about how long they’re likely to be dependent on your income. Take out a policy for that amount of time, and you’ll know they’ll always be supported if you were to pass away prematurely.

Getting the right policy length can be tricky but tie it to the amount of time you expect your income to be depended on and you can’t go wrong.

What our life insurance expert says

Level term policies are a great way of ensuring your loved ones would be looked after if the worst were to happen. You can choose exactly how much you want your policy to pay out, so you’ll always know it’s enough to keep them secure.
Max Green Signature

Max Green

Life insurance expert

Can I get life insurance with no fixed term?

Yes, if you’re after life insurance that’ll cover you until the day you die then consider whole life insurance. Here you choose how much cover you want, and then pay a monthly premium based on that amount. If you die, your loved ones then get your cover amount as a cash lump sum – no matter when you die. This could be 5 years after you take out the policy or 50.

In some cases, you may not have to pay your premium forever, either. Certain policies will allow you to stop paying after a certain age, after which you’ll still be covered, and will still be eligible for a pay-out. You just won’t need to pay anything else in to get it.

There are a few downsides to whole life cover. As you’re guaranteed a pay-out, policies are usually pricier - it’s possible to pay more in than you’d get in your pay-out. However, the peace of mind in knowing your loved ones would be supported if you were to pass away often justifies the cost.

For most people, level term policies work just fine. They provide a safety net for long enough to ensure their dependents would be cared for financially if they passed away.

 

How can I get a level term life insurance quote?

Getting a quote is easy, and only takes a few minutes.  We just need a few details from you and then we’ll compare deals from the panel of insurers we work with to find you our best cover at our best price.

We’ll ask you for:

  • Your name and age
  • How much cover you want
  • How long you want to be covered for
  • An outline of your medical history
  • Whether you smoke
  • Whether you have any pre-existing conditions

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Should you get level term or decreasing life insurance?

When it comes to life insurance, you’ll see there’s two main types – level term and decreasing.

Level term life insurance pays out the same amount whether you die in year 1 or year 25 of your policy.

The main benefit of level term policies is that your pay-out remains the same no matter when you die. This makes them good for ensuring you leave enough behind to support your loved ones should you pass away.

Decreasing term policies pay out less the further into your term you get. If you took out £100,000 of cover and died in year 5 of your term, your loved ones might get £95,000 as a pay-out. if you died in year 25, they might get £10,000.

Decreasing term life insurance policies tend to be taken out to cover mortgages, with the pay-out amount decreasing in line with how much the policyholder has left to pay on their mortgage. Due to this, they tend to be cheaper per month than level term policies.

Whether you opt for a level term or decreasing term policy is up to you but think about what you want your pay-out to do before signing up. If you only want it to cover your mortgage, then decreasing term may be for you. But if you want to cover a bit more and have a fixed lump sum, consider level term. 

What happens if I outlive my life insurance term?

If you outlive the term of your policy, your cover ends. You normally won’t get back what you’ve paid in in premiums. But life insurance is designed to work as a safety net. Your premiums guarantee that if you were to die during the policy term, your family would be supported. So, surviving to the end of your term is a win-win situation, and the premiums you pay in are often justified by the peace of mind you get from having that safety net in place.

Can I get joint level term life insurance?

Yes, level term cover is available as a joint policy. Here you’d cover two lives on one easy-to-manage policy. Joint policies tend to be cheaper than taking out two separate life insurance policies, so they’re a useful option for couples.

To get a joint level term cover quote, simply select the joint option during the quote process.
 

Does level term life insurance cover pre-existing conditions?

Most policies will cover pre-existing conditions, you may just have to pay more in premiums if you have one. A pre-existing condition can be anything from asthma to heart disease, but insurers will have their own list of conditions they deem to be pre-existing medical conditions, so it’s worth checking what these are before taking out a policy.

Can I get critical illness cover with level term life insurance?

Yes, critical illness cover is available as an add on with any level term life policy. For a slightly higher premium per month, you’ll be eligible for a pay-out if you suffer a severe injury or become seriously unwell during your cover term. This is a handy way of increasing your security net, ensuring your family would be financially secure no matter what life throws at you.

Wondering why we ask all this? Find out in our guide on how life insurance premiums are calculated.

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