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Level vs Decreasing Life Insurance
Level term and decreasing term are two popular types of life insurance. Both are really useful insurance products but are designed to meet different needs. Here we explain how each product works and how to decide which one to choose.
- Do I need life insurance?
- What is level life insurance?
- What is decreasing life insurance?
- How does the cost compare?
- What about critical illness insurance?
- I want to know more…
The answer to this question is personal to each individual, and for this reason, it’s hard to give you an answer without knowing more about your financial situation. But as a simple rule, if you have a family that depends on you financially, then you should at least consider life insurance. The product is designed to provide a financial safety net should you pass away, and the insurance money can be used however you and your family decide. Whether that’s to pay off outstanding debts, or cover ongoing living costs, life insurance can ease financial worries at an already difficult time.
In our experience, people tend to think about life insurance at two points in their lives, first, when they take out a mortgage, and secondly, when they have children. For many of us, our mortgage will be the largest debt we will ever face, so it makes sense to get this debt protected with life insurance. Equally, we all want our children to lead the best lives possible, even when we’re not around, and that’s where life insurance can come in handy.
Level life insurance is a type of term life insurance that protects you and your family for a fixed number of years. You choose how long you’d like to be protected for when you buy the policy, say 25 years, and the insurer charges you monthly premiums during that time. When you apply for your policy, you also choose the amount of cover you’d like, say £100,000, and this amount stays fixed for the full term of cover. So, your policy will pay your family £100,000 if you die during the 25-year term.
Level term life insurance is a useful product if you have a family and want to help them cover their ongoing living costs. The product is also useful for those people who have an interest-only mortgage, where the loan amount does not reduce over time.
Example: Mark (35), Claire (32) and their two children, Jake (4) and Maggy (2), have just purchased a new home, worth £300,000, with an interest-only mortgage and a term of 30 years. The family currently spend £3,000 per month on living costs and are dependent on both incomes to cover the regular family expenses.
Mark and Claire both decide to take out level life insurance policies of £400,000 for 30 years. If either of them dies during that 30-year period, the other can fully pay off the £300,000 mortgage and will have £100,000 remaining to help cover other living costs for a number of years.
Having two separate life insurance policies provides an extra layer of protection because the family will receive two insurance payouts if both parents were to pass away, providing extra financial support to the children.
Decreasing life insurance is often sold as mortgage protection life insurance, the two products are pretty much the same. This is another type of term life insurance product which protects you and the family for a number of years.
The main difference between level and decreasing life insurance is the way the cover amount, or insurance benefit, works. With level term life insurance, the initial cover level stays the same throughout the term, so your family will always receive the same amount when you die. Decreasing term life insurance, on the other hand, has a cover amount that reduces over time and is specially designed to protect repayment mortgages, where the amount of your loan also reduces over time.
Example: Jack (27) and Mike (26) have purchased their first home together, worth £150,000, with a repayment mortgage and a term of 25 years. The mortgage repayment makes up a large chunk of their monthly expenditure, so they decide to buy a joint decreasing life insurance policy worth £150,000 with a term of 25 years.
If either of them dies during that 25-year period, the other can pay off the outstanding mortgage. Their initial cover level of £150,000 will reduce over the 25 years to reflect the reduction in their mortgage, so they can rest assured that their mortgage will be paid off should the worst happen. The insurance is well suited to their smaller budget because a joint policy is cheaper than two separate ones.
Decreasing term life insurance is a little cheaper than level term life insurance because the amount of cover reduces over time. To see if you could save money with decreasing term life insurance, request a callback from an expert LifeSearcher today.
Some people decide to add some to their life cover, which means that they will receive their insurance money earlier if they fall ill with one of the serious illnesses covered by the policy.
It’s possible to add critical illness insurance to either a level or decreasing term life insurance policy, so regardless of which type of life insurance product you choose, you can still add illness protection if you want to.
We’re here to help. Call us on 0800 316 7253 or request a callback from one of our expert advisers. We’ll arm you with the right info and answer any questions so you can choose the right way to protect the life you love. We look forward to chatting with you soon.
A qualified actuary, turned consultant, Katie works with insurers and distributors to make protection propositions more accessible, pricing more transparent and marketing messages more simple. With experience at Swiss Re and Vitality, she looks to do things better across the full insurance value chain.See all articles by Katie Crook-Davies
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