Life insurance is easier to understand than it appears, and level-term life insurance is no exception. But what exactly is level term life insurance, and how does it differ from decreasing term life insurance? Learn more in our handy guide, where we explain in detail how this form of life insurance policy can help financially support your loved ones if you die.
What is Level Term Life Insurance?
Level life insurance is a sort of term life insurance that provides coverage for you and your family for a set number of years. When you acquire the policy, you choose how long you want the cover to last, say 25 years, and the insurer costs you monthly premiums during that time. When you apply for your policy, you also select the amount of cover you want, say £100,000, and this sum remains fixed for the term of the policy. So, if you die during the 25-year term, your policy will pay your family £100,000.
If you have a family and want to help them cover their ongoing living expenses, level-term life insurance is a good option to consider. The programme is also beneficial to consumers who have an interest-only mortgage, in which the loan amount does not decrease over time.
How Does Level Term Life Insurance Work?
When you open a level term life insurance policy, you’ll be asked to choose a policy term (typically between 10 and 30 years) and a pay-out amount. The cost of your monthly premium will be computed based on this, as well as some other parameters listed below.
You will then pay that premium on a monthly basis for the life of the policy. If you die within the policy term, your dependents will receive the first pay-out. If you outlive the policy term, you will simply stop paying premiums and will need to take out a new policy if you believe you still need cover.
In this aspect, level term differs from decreasing term life insurance, in which the pay-out reduces over the period of the policy, and the whole of life assurance, which has no specified term and pays out upon your death, regardless of when that occurs.
What Much of Level Term Life Insurance Do I Require?
A few factors will determine how much level term life insurance you require. Consider how much your dependents rely on your income, any mortgage or other loan obligations you still owe, and how much you can afford to pay for premiums each month.
You can put your life insurance policy in trust to ensure that your payout is financially secure. This can help to keep the value of a payout from becoming liable to inheritance tax and from being included in your estate. When this occurs, it becomes a part of the ‘probate’ process, which is the distribution of your estate after your death.
Is it possible to obtain level term life insurance with no set term?
Level term life insurance, as the name implies, lasts for a certain amount of time, such as 20 or 25 years. Whole-of-life insurance is a good option if you want a policy that guarantees a set level of money if you die.
Keep in mind that this sort of insurance will most likely be more expensive because insurers will have to pay out at some time. Many term insurance policies do not result in a payout. Not because the insurer denied a claim, but because the policyholder lives past the term’s expiration.
What does Level Term Life Insurance Cover?
The proceeds from level term life insurance can be spent any way your beneficiaries see fit. It can, for example, assist with:
- Cover off a mortgage
- Pay for your child’s or your own school’s or university’s tuition.
- Pay for daily living expenses
- Make a savings account for your loved ones.
- Make arrangements for your funeral.
- Personal loans and debts repayments.
Read also: The basics of whole life insurance UK
Level term insurance that includes critical illness cover
Critical illness cover is an optional extra that you can add to any level term life insurance policy. It is intended to pay out a lump payment if you are affected by one of a set of pre-determined circumstances (critical illnesses).
If you are unable to work due to your ailment, this life can help you keep up with day-to-day living expenses and maintain your standard of living.
Level Term Life Insurance Costs
Your premiums will be determined by a variety of factors. First and foremost, consider your health, your family’s medical history, and the general riskiness of your lifestyle – including whether or not you smoke.
Aside from that, the length of the term you select and the quantity of the pay-out you desire will, of course, determine the amount you pay for premiums.
In general, level term life insurance policies have guaranteed premiums, which means that they will remain constant during the policy’s term. This is in contrast to reviewable premiums, which are susceptible to change based on a variety of factors such as general changes in the insurance market and inflation.
How can you reduce the Cost of Level Term Insurance as low as possible?
#1. Don’t overinsure yourself.
Calculate how much you want to give your heirs, taking into account items like debts, your mortgage, and burial fees.
#2. Check to see if you aren’t already insured.
You may already have a cover by your employer as part of your work’s benefits package.
#3. Maintain a healthy lifestyle.
The healthier you are, the less probable it is that the insurance will have to pay out, so your rates will be lower.
#4. Take out a policy as soon as possible.
Life insurance is less expensive when you’re younger, so if you can, get it while you’re still young.
#5. Compare prices and policies for life insurance
Weigh the benefits and drawbacks of various life insurance policies until you find one that meets your requirements.
Read Also: Tips for Successful Alternatives to Life Insurance Investing
Will My Level Term Life Insurance Payout be Taxed?
Life insurance payouts are often exempt from taxes such as income and capital gains. In some cases, however, a lump payout from a life insurance policy may be subject to inheritance tax.
Current guidelines provide that any money or assets left to another spouse or civil partner are not subject to inheritance tax. However, if you choose to leave your life insurance payment to someone else, part or all of it may be subject to 40% taxation if the value of your estate exceeds the current £325,000 threshold. By putting your life insurance policy in trust, you may be able to avoid paying inheritance tax on it. However, it is critical that you seek experienced legal guidance on this topic.
What are the Advantages of a Level Term Life Insurance Policy?
Level term insurance is excellent if you want to ensure that the people you care about receive a fixed lump sum of money if you die.
Another advantage is that your premium will remain constant for the duration of the policy unless you make any modifications to it.
What are some of the Disadvantages of Level Term Life Insurance?
Because level term insurance provides you with the protection of a fixed sum of money, premiums are typically higher than for decreasing term life insurance policies. When it comes to this form of cover, the younger you are when you get it, the less expensive it is going to be.
Level-term insurance also does not account for inflation, so the pay-out value may appear to be more than adequate when you purchase the policy. But in 20 years, it could be worth a lot less.
Is it possible to cancel Level Term Life Insurance at any time?
While there is nothing to prevent you from cancelling your insurance, you will no longer be able to submit claims. If you terminate in the middle of a contract, you may need to pay certain administrative fees. Depending on how much time you have left, it may be better to let your policy lapse rather than cancel it. One thing to keep in mind is that many policies will auto-renew, so if you wish to cancel before the contract expires, you must notify your provider.
If I cancel my Level Term Life Insurance, do I get my money back?
o you purchase insurance from and when you cancel it will determine this.t. Many insurance companies will provide you with a grace period beginning when you take out a policy, during which time if you cancel your policy, you’ll get your money back. If you wish to cancel after the grace period, some companies will refund a portion of your payment minus any administrative expenses.
What is the Distinction between Level Term and Decreasing Term Life Insurance?
One of the most important options to make is whether to choose a fixed level of payout over the length of the policy or a diminishing amount.
The sum insured for your life in the first year of a level term insurance policy is the same as it is in subsequent years. So, if you had a £200,000 policy for 25 years and die at any point during that time, your dependants will receive £200,000 – regardless of how long the policy is still active.
As a result, they would be able to:
- Clear all outstanding bills.
- Pay for funeral expenses
- Maintain their standard of living in the absence of your income
On the other hand, with decreasing term life insurance, the potential payout decreases year after year. For example, if you died in the first year of the policy, your dependents would receive £200,000; if you died halfway through the term, they would receive £100,000.
This is due to the fact that, in many circumstances, the magnitude of a family’s financial commitment decreases over time as their mortgage – often their largest spend – is paid off. As a result, decreasing term life insurance is often known as mortgage life insurance. Its primary purpose is to pay off a jointly held mortgage in the event that one of the partners dies.
Similarly, mortgage life insurance is frequently held by both partners, particularly if they are jointly responsible for monthly instalments.
Another significant distinction between level and decreasing life term insurance is that, given the same beginning level of cover, the latter is likely to be less expensive. This is due to the fact that the value of reducing life insurance decreases over time.
Level Term Life Insurance Alternatives
In addition to level and decreasing term life insurance, the following cover choices may be worth considering:
#1. Whole Life
Whole of life cover has no policy term, which means it will pay out a fixed amount regardless of when you die. As a result, it may be a more expensive option.
#2. Joint Policies
If you have a partner who is looking for life insurance, it may be worthwhile to compare the costs of two single policies with joint cover.
Joint policies are typically less expensive. The reason for this is that, even if both of you die, a joint policy only pays out once.
#3. Family Income Benefit
Family income benefit is a sort of life insurance for parents and families that pays out monthly tax-free instalments to cover the expense of a lost income for a predetermined length of time.
Level Term Insurance FAQs
What happens at the end of level term life insurance?
Your cover will cease at the conclusion of the agreed-upon policy term, and all premiums will have been paid. If you outlive your policy term, the payoff becomes null and void.
Does level term life insurance have cash value?
Level-term life insurance has no financial value. When your level-term policy ends, you may be able to convert it into a permanent life policy with a cash value.
What reasons will life insurance not pay?
If you die while committing a crime or engaging in criminal behaviour, your life insurance company may refuse to reimburse you. For example, if you are killed while attempting to steal a car, your beneficiary will not be compensated.
