What is level cover life insurance?
17 Nov 2020
When you take out a life insurance policy, you could be asked if you’d like level cover life insurance or decreasing term life insurance. It’s quite an important question, as the two are pretty different! It is wise to have a good idea of how each of them works before you make the decision.
So, what exactly is level cover life insurance, and how does it differ from decreasing term? How does level cover life insurance work, and more importantly, which one should you opt for? Don’t worry - we’re here to help you decide.
Firstly, what is level cover life insurance?
A level cover life insurance policy would pay out the same amount of money for the entire duration of the policy, no matter when you claim. The amount you pay in monthly premiums also stays the same each month. Whether you passed away one year into your policy or twenty years, it wouldn’t make a difference to your pay-out. Simple, right?
When you take out your level cover life insurance, you choose the size of your pay-out (otherwise known as the ‘sum insured’) and the amount of time that you’ll be covered for (otherwise known as the ‘term’). Your premiums will be at a fixed amount, which is handy as they won’t increase with inflation - but that does mean that your pay-out amount won’t either. Think about it this way - £10,000 was worth considerably more twenty or thirty years ago than it is today. Your pay-out amount might seem like a lot of money now, but as inflation rises over the years it may not be enough to cover the costs you intend for it to cover. You may want to consider an 'indexed link' life insurance policy that assures your pay-out increases in-line with inflation.
If you don’t pass away during your term, your level term insurance will lapse and you will need to take out another policy if you’d like further life insurance. For life insurance that never lapses, you’ll want to take a look at ‘whole of life insurance’.
Okay, so what is decreasing term insurance?
Well, the clue is in the name! With decreasing term insurance, the pay-out amount, and the price of your premiums decrease over time. If you pass away near the beginning of the policy term, your family will receive more money than if you were to pass away near the end.
This type of product is ideal if paying off a repayment mortgage with your pay-out is the priority. A mortgage generally decreases over time too, so as you repay your mortgage over the years and the size of your loan goes down, your amount of life insurance cover goes down too.
Because the decreasing nature of this type of policy is less expensive to insurers, it’s often much cheaper than level term insurance. The drawback is though, of course, that you may not be able to leave your family quite as much money as you would be able to with level-term insurance. Yes, you should be able to leave behind enough to cover the mortgage repayments, but level term life insurance could leave extra to cover household bills and day-to-day expenses, any debts you leave behind, school or university fees, and just a bit of extra cash in the pot. Alternatively, another option could be to have a larger decreasing term policy and a smaller level term policy - which may mean a smaller monthly outgoing. It’s horses for courses and dependent on your individual circumstances, so speak to one of our expert advisers to understand what suits your requirements.
Which one should I choose?
Level term life insurance and decreasing term insurance are very different, so there is no right or wrong answer when deciding between them. It all comes down to what you are looking for in your insurance policy and what you’d like your pay-out to cover.
Level term life insurance is the perfect option if you would like a set amount of cover. You choose your pay-out amount and the length of time you need it for, and you can sit back and not think about it again. If you’re watching the pennies and you’re only really concerned about leaving behind a mortgage when you pass, perhaps decreasing term life insurance would be better suited to you.
If you’re still a bit unsure, that’s totally fine. There’s no need to rush the decision. Perhaps it would help to speak to one of our friendly experts? Our advice is completely free, and we can answer any further questions you have about life insurance. Give us a call on 0800 316 7253 and let’s get you and your family protected.
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