What is level term life insurance?
Level term life insurance is a form of cover that provides your loved ones with a fixed lump sum pay out if the worst were to happen to you.
The sum assured (or pay out amount) and term length of the policy are specified at the point of application.
Unlike decreasing term life insurance, the sum assured with level term cover maintains it’s value throughout the term.
Regardless of how far into your policy you pass away, your loved ones will receive a fixed amount.
However, if the end of the term is reached before your passing, the cover expires and no pay out will be received.
Why level term life insurance?
Level term life insurance is ideal for protecting your family against large expenses if you were no longer around.
This could be settling outgoings previously covered by your income:
- Mortgage repayments
- Day-to-day family living costs
- Outstanding debts in your name.
Or it could also be used to help your family with:
- The cost of your funeral, (average cost £4,271 – source: SunLife)
- Provide an inheritance, (to spend as they wish).
The sum assured holds its value, meaning that regardless of when you pass during the policy term, the pay out sum remains level.
For this reason, level term cover is well suited for covering expenses which do not change significantly over time.
Level term mortgage life insurance
Typically speaking there are two forms of mortgage in the UK:
With an interest-only mortgage, payments are only made on the interest accrued on the loan and not the property’s capital value.
In this instance, if you were to pass away, the value of your property would need to be covered in order to enable your family to remain in their home.
A level term policy is ideal in this instance as cover for the equivalent of your mortgage can be secured so that at any point the value of your property is covered.
As a result, your family will not have to worry about meeting the mortgage repayments without your income.
In contrast, a repayment mortgage results in monthly repayments slowly paying off the outstanding value of your home.
Therefore, the amount you owe the mortgage lender decreases over time.
In this instance, a level term policy would mean that as your mortgage decreases, more of the pay out could be used as an inheritance, to meet funeral costs or whatever else your loved ones deem fit.
If you only need to cover the balance of a repayment mortgage, a decreasing term policy may be more suitable.
Here, the pay out value can be set to reduce at the same rate as the outstanding balance.
Level term vs decreasing term life insurance
The key difference between level term and decreasing term life insurance is the pay out sum.
With level term life insurance, the pay out holds it’s value. This means, regardless of when you pass away during the term, the amount your loved ones receive is fixed.
Decreasing term life insurance, on the other hand, has a sum assured which reduces throughout the policy term.
Therefore, the further into the policy you pass, the less your loved ones will receive.
As the pay out sum decreases, so does the risk to the insurer, making this form of cover cheaper than level term.
Cost of level term life insurance
The cost of level term life insurance cover will depend on your individual circumstances.
As with other forms of life insurance, the risk you pose to the insurer will be used to calculate your premiums.
The greater the risk you pose, the more you will be charged for your cover protection.
The cost of your level term premiums will be determined by a number of key factors, including:
- The level of cover required
- The length of the term
- Your age
- Smoking status
- Medical history.
Because the pay out sum remains fixed throughout the policy, level term premiums will usually be more expensive than decreasing term.
At Reassured, all level term policies we sell have fixed premiums. This means the amount you pay each month will not change during the policy term.
How much level term life insurance do I need?
The amount of level term cover you require will depend on what it is you are looking to protect.
When determining the amount of cover required, consider how much your loved ones would need to pay for all the necessary outgoings.
For example, think about daily living expenses, household running costs, mortgage/rental payments and funeral costs.
Your available monthly budget is also likely to affect the amount of coverage you secure.
Your health and wellbeing will be taken into account when calculating your monthly premium.
Therefore, those who are older and/or in poor health may not be able to afford the desired level of cover.
As a result, you may have to reduce the amount of cover you take out.
In order to find the most cost-effective policy, it is best to compare quotes from multiple insurers.
Using an FCA registered broker, such as Reassured, can save you money and also help you make an informed decision.
What is level term assurance?
Level term cover is a form of insurance, as opposed to assurance, because a pay out is not guaranteed.
Insurance pays out if you die during the policy term, whereas life assurance guarantees a pay out when you die.
Whole of life insurance is a form of life assurance which pays out a lump sum to your loved ones after you are gone.
Unlike level term, whole of life insurance lasts for the rest of your life. Meaning that as long as you continue to pay your premiums, the policy does not expire.
Whilst this guarantees your loved ones a pay out, it may not be a cost-effective solution for those who are younger and/or in good health.
This is because it is possible to pay more into the policy than it will pay out.
As a result, those in this demographic are more likely to benefit from a level term policy which offers lower premiums and less risk.
Joint level term life insurance
On average, a joint level term policy will save you approximately 25% compared with two single policies.
A joint level term policy protects two people simultaneously and upon the first death, the surviving party will receive a fixed pay out.
However, once a pay out has been issued, the joint cover expires.
This can leave the surviving partner uncovered and needing to secure new cover when older – which is likely to mean higher premiums.
Equally, it is important to consider what would happen if both parties were to pass away at the same time.
In this instance, only one pay out would be made, which may not be sufficient, especially if you have young children.
When considering whether to take out a joint or single level term policy, it is important to determine the cover you require and if this meets your needs in a worst-case scenario.
What happens if you outlive your level term policy?
When arranging your level term life insurance, the term for which you are covered will be specified.
Typically, this will be somewhere between 20-40 years.
For example, to cover your mortgage until it is paid off or until your children are financially independent.
However, your policy is only valid during this period. If you were to pass away after the policy has expired, no pay out will be issued.
Level term life insurance and critical illness
Most level term policies allow you to include critical illness cover at an additional monthly cost.
This extra level of protection provides you with a pay out if you are diagnosed with a critical, yet non-terminal illness, covered by your policy.
Typically, this covers a heart attack, stroke and various forms of cancer, amongst other life-changing illnesses.
The added coverage could help pay private medical bills, fund necessary adaptations to your home or simply to enjoy with your loved ones.
Level term life insurance and terminal illness
It is commonplace for most level term policies to come with terminal illness cover as standard, (at no extra cost).
This enables you to claim early on your policy if you are diagnosed with a terminal illness and given less than 12 months to live.
An early pay out could be invaluable to cover expenses such as private medical treatment, a carer, house adaptations or provide you with peace of mind by alleviating any financial stress.
When your circumstances change
Your life insurance needs are likely to evolve over time, as your personal circumstances change.
For example, you may purchase a larger family home and/or decide to have children.
In both of these instances it is possible to evoke a special events option on your level term policy.
This allows you to increase your level of cover without the need for additional underwriting.
When your circumstances change, it is important to contact your insurer to ensure you have enough coverage in place to meet your needs.
It may also be beneficial to obtain a new set of quotes to determine whether it is more cost effective to alter your existing policy or take out new cover.
Writing your level term policy in trust
Writing your life insurance in trust is essentially a legal agreement whereby you sign the rights of your policy over to a trustee upon your passing.
This process brings with it a number of important benefits:
- Avoid or minimise 40% inheritance tax (IHT)
- Avoid probate, for a faster policy pay out
- More control over your policy, (who gets the proceeds, how and when).
Upon your death, by default, the value of your level term life insurance policy will form part of your estate.
Anything over the £325,000 inheritance tax threshold is chargeable at 40%, reducing the amount received by your loved ones.
However, writing your life insurance in trust allows you to detach your policy from your estate, meaning your loved ones receive 100% of the pay out.
It will also impact the overall value of your estate, meaning the amount of inheritance tax paid may be reduced too.
Another benefit of writing your policy in trust is that you do not have to wait for probate, allowing your loved one’s faster access to funds.
Finally, by appointing a trustee, you are able to detail how you would like the proceeds to be distributed.
Whilst this is at the discretion of the trustee, it can increase the control you have over the policy after you are gone.
Reassured’s free trust service
Writing your level term life insurance policy in trust doesn’t have to be difficult.
At Reassured, we are proud to offer all our customers a free trust writing service, (if required).
One of our team will walk you through the application process, answering any questions you may have and putting your mind at ease.
Compare the best level term quotes » Save time and money
Did you know level term life insurance quotes can differ significantly in cost between insurers?
Therefore, to ensure you get the right policy, at the best price, it is essential to compare quotes.
At Reassured, we can carry out this process on your behalf, saving you valuable time and money.
And the best bit is our award-winning broker service is completely free to use.
We will help you understand all aspects of the policies available, providing you with all the information you need to make an informed decision.
Simply get in touch today to start your level term life insurance quote.