What is level term life insurance?
Level term life insurance is a popular type of cover which pays out a fixed lump sum to your beneficiaries if you die within a set time period, (known as the ‘term’).
You decide on the sum insured (the pay out) and the term length, which can be anything from 5 years, 25 years, 50 years or more.
Regardless of whether you die 4 weeks or 20 years into the policy term, the pay out remains fixed. Hence the name ‘level’ term. Your monthly premiums generally remain fixed too.
Level term protection is generally a good option if you like certainty; you know what you have to pay each month, the pay out if you die and how long cover lasts.
Why might you want level term cover?
Often the policy term aligns with your mortgage term, to ensure your dependents are not burdened with a large debt if the worst were to happen.
Level term policies can be a great option to protect your family – You decide how long you need cover for, (i.e. until the mortgage is paid off and/or the children are financially independent).
You then decide how much cover you require/can afford – You may want to fully cover your mortgage, plus leave an additional lump sum to cover future family living expenses and/or replace your income.
Level term is also a good option if you have an interest-only mortgage, where the capital borrowed does not decrease over time, (unlike a repayment mortgage).
How does level term cover work?
Level term policies are a pretty simple concept. You set the length of the policy term, for example, 20 years, and the sum insured, for example, £150,000.
You determine who gets the money, how much they get and how it is paid. (You may want to write your policy in trust).
If you were to die at any point during the term, regardless of whether that is 4 weeks or 19 years into the policy, the pay out remains the same – £150,000.
However, once your cover expires, you will not be able to claim on the policy. The policy also ends after a pay out is issued.
Level vs decreasing term
If you just require cover which decreases in line with your mortgage and does not need to provide your dependents with an additional lump sum, decreasing term cover may be a better option.
Decreasing term is usually cheaper than level term cover. This is because the sum insured decreases over time and therefore the risk of the insurer having to issue a big pay out reduces.
If you have a repayment mortgage and have level term cover, the further into the policy you live, the more funds your beneficiaries will benefit from. (As long as you do not outlive your policy).
Read our blog post on decreasing vs level cover »
Level term vs whole of life
Unlike whole of life, it is possible to outlive a level term policy, meaning you may pay into a policy that your dependents never benefit from.
However, whole of life premiums are generally much more expensive as the insurer is guaranteed to pay out at some point.
The cost of level term cover
Remember, if you outlive your level term policy and then want to take out a new policy, you may pay significantly more because of your increased age.
Guaranteed vs reviewable premiums
When you take out a level term policy, you have a choice of either guaranteed or reviewable premiums.
If you choose a guaranteed premium, the insurer will never change your monthly premium cost. You always know what you are going to pay throughout the policy.
In contrast, reviewable premiums normally cost less at first, but your insurer has the right to increase the cost during the term.
So, what seems initially like a cheaper policy may in the long-term prove to be more expensive.
Joint or 2 single policies?
You have a choice to buy cover just for yourself, or for both you and your partner.
Although a joint policy may be marginally cheaper than two individual policies, it will only ever pay out once.
Also, if you have joint cover and your partner was to die, your policy would expire. Leaving you to renegotiate a new policy when older, which would almost certainly be more expensive.
Lastly, it is a sad fact of life that relationships can break-up. If you have joint cover and suffer a break-up you will most likely have to cancel the policy.
Level term life insurance policies now often include a terminal illness element as standard.
This means if you are diagnosed by a medical professional with an illness covered by your policy and are expected to die within 12 months, you and your family could enjoy a lump sum to help you get through those last difficult months.
You can also opt to have critical illness cover included, which pays out if you suffer a life-changing illness, (covered by your policy).
This additional cover protection is likely to increase the cost of your monthly premium.
The type of critical conditions commonly covered includes heart attack, stroke, Alzheimer’s and Parkinson’s disease. A pay out could help replace your lost earnings or pay for necessary home alterations.
It is important to check which illnesses/conditions are covered by your policy, as not all cover is the same.
Does your life insurance still meet your needs?
It is important to review your life insurance if your personal circumstances change. For example, if you have more children, or buy a more expensive house with a larger mortgage.
Does your life insurance policy still meet your family needs? If not, contact our experts at Reassured to discuss your options.
Level term life insurance in summary:
- Provides certainty on pay out amount and length of cover
- Monthly premiums can be fixed
- Affordable for most, (especially if you secure cover while young)
- Cheaper than whole of life cover
- Terminal or critical illness cover can be added
- Joint policy option to protect you and your partner
- Policy can cover your mortgage and family’s future living expenses
- Set cover to leave an additional lump sum for your family
- Protect children until they are financially independent
- Write your policy in trust to avoid 40% inheritance tax and probate.
- Only pays out if you die during the policy term
- If you cancel your policy, there is no cash-in value
- Inflation could mean the pay out is worth less in ‘real terms’ in the future
- Cover will end if you don’t make monthly payments
- More expensive than decreasing term
- Personal circumstances may change, meaning your policy is no longer suitable.
Why use Reassured to secure your level term policy?
- Life insurance is what we do, it is all we do
- We have secured 1000’s of level term policies for our customers
- We will scan the market on your behalf, finding the most competitive quotes
- 13,500+ people cannot be wrong! We have an ‘Excellent‘ average Trustpilot rating – 9.6/10
- We are completely independent, impartial and do not charge you a fee
- There is no obligation to take out cover
- We are a non-advised broker – we simply listen to your personal circumstances and find you the best quotes.