Child playfully feeding his mother some watermelon in the park December 07, 2017

All life insurance policies are the same, right? Well, that’s not quite the case, and with life insurance, you can normally opt for either level term or decreasing term.

Both have their own benefits and can help to protect your family financially in the event of death during the policy term.

In this guide, we’ll explain the differences between the two and help you decide which could be the best type of policy for your own situation.

This is a general description of the policies widely available – you will want to ensure that any specific policy suits your needs and circumstances.

What is level term life insurance?

Life insurance is designed to protect your family financially, when you’re no longer able to. For instance, if the policy pays out it could be used to:

  • Pay off an existing mortgage
  • Help with ongoing household bills
  • Pay for your funeral
  • Provide a good standard of living for your family

Simply put, level term life insurance is designed to pay out if you die during a fixed period of time (the term). If you die outside of this term, there will be no payout.

For level term:

  • Premiums are fixed and will never change unless you change your policy.
  • The payout also remains the same throughout the term unless you change your policy.
  • This policy could be good for covering an interest-only mortgage, other debts, or for protecting loved ones.

Example of level term life insurance

  • Cover for the value of £100,000 is taken out
  • The term is fixed for 20 years
  • If you die during the 20 years and make a valid claim, the payout of £100,000 is made
  • If you die after the 20 years, your cover will have ended and there will be no payment

What is decreasing term life insurance?

Decreasing term life insurance is similar to level term with one significant difference – the amount of cover reduces over time roughly in line with the way a repayment mortgage decreases. It’s usually purchased to help clear a specific debt – such as a repayment mortgage. As this debt decreases over time, so will the amount of cover.

Essentially, on death, the product is designed to help make sure the repayment mortgage is settled. The amount paid is reflective of how long has passed since the policy was bought.

It’s important to note that your policy may not completely pay off your outstanding mortgage, unless you ensure that your amount of cover is adjusted to match any new mortgage arrangements. You must also check that the length of the policy is long enough to cover the duration of your mortgage term and that the interest rate applied to your mortgage doesn’t become higher than the interest rate applied to your policy.

Your premiums stay the same throughout the term unless you change your policy.

Example of decreasing term life insurance

  • A policy is taken to cover the cost of a repayment mortgage at £200,000.
  • After monthly repayments, the total owed on the mortgage after the first year is £188,000.
  • The cover on the policy decreases roughly in line with the mortgage and so has also reduced.
  • If you were to die during the policy term, depending on how long you have had the policy and the amounts shown in the policy schedule provided when you took it out, a final settlement figure would be paid.
  • The final settlement figure would reflect that the amount of cover had decreased over time.

Which life insurance policy is right for me?

So there are some clear differences between the two policies, but which one could be right for you? A lot will depend on your own needs and circumstances:

Level term life insurance

  • Premiums stay the same for the term of your policy unless you change it.
  • There is a fixed amount of cover, agreed when the policy is taken out.
  • If you die during the term of the policy, your family could receive a cash sum that can be used to cover everyday living expenses, childcare costs or help pay the mortgage.
  • This option could be perfect for those who want to help make sure their loved ones are financially secure.

Decreasing term life insurance

  • Premiums stay the same for the term of your policy unless you change it.
  • The amount of cover reduces roughly in line with the way a repayment mortgage decreases, as it’s designed to help protect the repayment mortgage.
  • This option could be perfect for those who want to help make sure a repayment mortgage is paid off, if they were to die during the policy term.

Simply put, with a level term life insurance policy, if you were to die within the term, your family will be paid the pre-agreed cash sum.

For decreasing term, the cash sum reduces throughout the policy term, approximately in line with the decreases in a repayment mortgage.

What should I know before applying?

Make sure to think about the following before getting a life insurance quote:

  • How much do you want to be insured for?
  • Do you want a level or decreasing term policy?
  • Will you want to open a single or joint policy?
  • How long should the policy run for? For instance, 15, 20 or 25 years
  • Will you want to add critical illness cover?
  • Will your circumstances change in the future?

Are there any other life insurance options?

You should have a much better understanding of the key differences between level term and decreasing term life insurance. But are there any other potential policies to choose from?

Well for starters, there are options based on your age or relationship:

  • Over 50s life insurance: A specialist insurance designed to meet the demands and needs of people aged 50 to 80 who don’t have funds to help contribute towards funeral costs or to leave a gift to family, and want a fixed cash sum to give to their loved ones when they die. It’s for people who want guaranteed acceptance with a simple application process and do not want to undergo a medical or answer lifestyle questions.
  • Joint life insurance: Rather than two people in a relationship taking out individual policies, they can instead opt for a joint policy. The joint life policy will cover both lives, usually on a first death basis. This means the chosen amount of cover is paid out if the first person dies, during the length of the policy, after which the policy would end.

Do you want the best of both?

You can apply for both types of life insurance if you wish.

Good to know

Direct Line’s Life Insurance is provided by Legal & General