Level term vs decreasing term life insurance

It's a type of cover you have for a certain amount of time. When you take out the policy, you choose the term and the cover amount, which you could base, for example, on the cost of raising children until they leave home. If you were to pass away during the time you’re covered (or the term), your beneficiaries will get a fixed payout. And they could use the payment towards helping to pay:

• off your mortgage, debts, credit cards or loans.
• for your funeral costs.
• university fees or wedding costs for your children.
• living costs, replacing your income.

Here are some important points to note when considering level term life insurance:

• You’ll pay the same amount monthly for the entire length of the policy.
• The policy has no cash value so if your payments stop, so does your cover.
• The payout remains the same throughout the term.

For example, if you take out a level term life insurance policy you could choose a fixed amount of £250,000 over a 25-year term. If during this time you pass away, the payout of £250,000 will be made. If you die after the 25 years, the insurance policy will have ended and there’ll be no payment.

If you’re worried about the cost of living increasing in the future, there’s an option to make your cover amount increase in line with inflation. Your monthly payments may rise, but it would ensure your lump sum isn’t worth less at the end of the policy because of the cost of living.

Decreasing term life insurance is often called ‘mortgage’ life insurance because it can be commonly used to help pay off your mortgage. The insurance policy is sometimes taken out at the same time as buying and mortgaging a property, so that those you care about aren’t left with the burden of a big debt, if the worst happens.

The payout reduces over time as the amount left on your mortgage decreases. However, similar to level term insurance, your monthly premiums will stay the same throughout the term. Decreasing term insurance premiums are often lower than level term insurance premiums too.

It’s also worth noting that decreasing term life insurance is designed for a repayment mortgage rather than an interest-only mortgage, as it won’t pay off a large amount of capital at the end.

It’s a good idea to read the terms and conditions of decreasing term policies, as they often include an interest rate cap. This means, your insurance might only cover your debt up to a certain rate of interest. If the interest rate on your mortgage rises above this rate, the payout may not fully cover the outstanding debt. It’s a good idea to check in, from time to time, to make sure your cover still suits your needs.

The main difference between these two types of life insurance is that the decreasing term life insurance payout reduces over time, whereas the level term insurance pays out the same lump sum at any point during the term. 

Should I choose level or decreasing life insurance?

When you’re deciding which type of life insurance is right for you, think about the cover that best suits your needs.

Benefits of level term life insurance:

• The lump sum payout will be the amount you agreed when you took out the policy.
• If you die within the term, your loved ones will be paid the full lump sum.
• It’s a good option if you have an interest-only mortgage.

Benefits of decreasing life insurance:

• It’s typically cheaper than level term insurance.
• Your cover amount stays broadly in line with your debt amount, so you don't pay for more cover than you need.
• It's a good option for repayment mortgages or other long-term loan amounts that go down over time.

It’s not uncommon to have level and decreasing term insurance together that would pay off your mortgage and provide a lump sum for living costs. This way, any outstanding debt is paid off and additional money is available to support your beneficiaries.