Guides

Level or Decreasing Life Insurance: What’s the Difference?

8 minutes

Life insurance is an important product for anyone who wants to protect their family and loved ones from financial difficulties when they pass away. But not all life insurance policies are built the same, and offer different levels of cover, terms and payout options.

Is level or decreasing life insurance cover right for you?

  • What is level life insurance cover?
  • What is decreasing life insurance cover?
  • Do I need level or decreasing life insurance?

The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser. 

When taking out a life insurance policy, there are several cover options to consider. These can include the type of policy you choose, which can also include a variety of terms, including decreasing or level cover.
 
The terminology can be confusing, but if you’re buying life insurance, you want the peace of mind that you have a policy in place that does the best possible job of financially looking after your dependants, should you die unexpectedly. 

In this guide, we explore two of the different types of cover available, as well as looking at what each might mean for you, to help you choose the right life insurance for your needs and circumstances.

What is level life insurance cover?

Level life insurance cover is a type of policy that offers consistency, in that the amount you pay is the same each month and what you can expect to be paid to your dependants when you pass away doesn't change. The amount paid out at claim will remain the same throughout the term of your policy, no matter when it is made. 

This means that as long as all conditions of the policy are met, your loved ones will receive an agreed payout if you should pass away, to help cover any expenses and on-going financial commitments. 

It’s also worth bearing in mind that the payout at claim will not increase to keep up with inflation, so its ‘buying power’ will be worth less in future years.

How does level life insurance work?

Level term life insurance provides stable cover for the time period you choose it to last for. It allows you to choose a desired level of cover and how long you want to be covered for. In the event you pass away during this period, your dependants will receive a payout. 

The period you choose to be covered for can change based on your circumstances. It can be as little as five years if you only want cover for a short period, or as long as 50 years if you want longer-term peace of mind for your family. The length of cover available can vary across different providers. 

The amount you’ll pay monthly for level life insurance will depend on how long you want the policy to last, among other factors – you’ll generally find you need to pay more for a longer period of level cover life insurance. Your age and certain lifestyle factors, such as whether or not you smoke, and also your medical history also make a difference. But as long as you keep up with your payments throughout the term of your cover, level life insurance means you have peace of mind that your loved ones will receive the agreed sum. 

What is decreasing life insurance cover?

Decreasing life insurance cover is an option where you pay the same amount each month, but the payout value decreases over the term of your policy. This means your partner or family would receive a variable sum depending on when you die.

At the start of the insurance policy, the payout if you claim is higher, but this value reduces throughout the term of your cover. With this type of insurance policy, you choose how much cover you want at the start and how long you want to be covered for, with the payout value decreasing as time passes, eventually reducing to zero at the end of your chosen policy term. 

How does decreasing term life insurance work?

The value of a decreasing cover life insurance payout at claim goes down over time. When purchasing a policy, you will be able to tell your insurer how much cover you want initially This will be your payout level at the start of your policy, but it decreases over the term of your policy, eventually reducing to zero, by the time your policy ends.

Many people choose this type of insurance to cover their mortgage, where they have a capital and repayment mortgage (this is one where your payment to your lender is made up partly of the amount your borrowed, and partly the interest). You can choose how long you want the cover to last, and many choose to align their life insurance to last as long as the remaining years on their mortgage, so that if they do pass away, their family will be able to pay off some or all of  any remaining balance outstanding on the mortgage.  

Decreasing life cover is usually cheaper than level term life insurance, and the monthly payments stay constant across the period of cover.

What is the difference between level and decreasing cover?

Level and decreasing cover can be suitable for a range of circumstances, but they have their differences that can make them unsuitable too. Level cover will pay out the agreed amount of total death benefit if you pass away during your policy term. Whereas the amount paid out if you die during the term for decreasing cover reduces over the time the policy lasts, eventually reducing to zero at the end of the term. It is designed to reduce in a similar way to the amount outstanding on a capital and interest repayment mortgage reduces as you make repayments to your lender.

Level cover could be a suitable option for those who want their death benefit to protect their children, housing costs, families and more, at a consistent level of cover, regardless of any debts. Whereas decreasing cover is more suitable for covering the reducing amount owned on a capital and interest repayment mortgage. Whilst you can ask for your decreasing level insurance to cover you initially for more, this could end up making your premiums quite expensive, and remember the cover is really designed to reduce in a similar way to the amount owed on a capital and interest repayment mortgage.

How much does level or decreasing life insurance cost?

Typically, decreasing life insurance is often the cheapest option, mainly because of the reducing amount paid out if you pass away, compared to level cover where the payout remains the same throughout the length of your policy. Depending on the age you take out your policy and several other factors, like your health, you may find life insurance is more or less expensive than you expected.

At LV=, monthly premiums can start from just £5 a month, although this depends on your personal circumstances, so not everyone will be able to get cover for this amount. The amount of cover you choose will affect the cost. The length of your term will also affect how much you pay, with policies ranging from five to 50 years, depending on your age.

Do I need level or decreasing life insurance? 

The type of life insurance you may need will depend on your personal situation. For instance, homeowners with capital and repayment mortgages (where the amount owed on the mortgage reduces over the term of the mortgage as repayments are made) often choose decreasing life insurance cover. This type of policy may also be suited to people whose financial commitments are likely to decrease in a similarly predictable way. 

If you plan to make underpayments or change the terms or type of mortgage, then there’s a chance this policy type may not align with the amount outstanding on your mortgage. In such cases, level term life insurance might be a better option, to provide some additional peace of mind.

Also, there are other costs to consider, for example If your partner would need to pay for childcare without your support, then your family might benefit from cover that goes beyond the amount owed and length of time your mortgage is set up for.

Level term life insurance might be a better fit for people who want to cover additional living costs and debts throughout the term. For this reason, level life cover will often be the better option for those who rent their home (as your monthly rent payments don’t end, like  a mortgage does) or for those who have paid off a mortgage entirely and want cover for family expenses.

Benefits of level life insurance cover

The benefits of level life insurance cover include:

  • A fixed amount is paid out at claim that gives your family reassurance.
  • Cover for more than set debts - this may be appealing if quality of life is important, or if you don't owe money.
  • Fixed monthly premiums.

Benefits of decreasing life insurance cover

The benefits of decreasing life insurance cover include:

  • Support for your loved ones. You'll get the reassurance that, if you're no longer around,  any outstanding capital and repayment mortgage balance can be taken care of.
  • Decreasing life insurance cover is generally cheaper than level life insurance.
  • Fixed monthly premiums.

Interested in level or decreasing life insurance?

At LV=, we provide both decreasing and level life insurance. In 2022 alone, we paid out over £80 million to support over 5,000 families who sadly lost their loved ones*. If you want security and peace of mind for your family, get in touch today.

* These figures also include claims for different types of life insurance, some of which we no longer offer.

Level vs decreasing life insurance FAQs

Does decreasing life insurance get cheaper?

Decreasing life insurance does not get cheaper over time – your monthly premium payments are fixed throughout the term. Instead, the potential pay-out amount decreases, but the amount you pay per month remains the same. However, because the amount of cover decreases over your policy term, this may be cheaper each month than with other types of insurance, including level term.

Can I cancel my life insurance?

You can cancel your life insurance policy at any time with LV=, although if you do, your cover ends, and you don’t usually get anything back that you’ve paid (unless you cancel it during the cooling-off period, which is within 30 days of your policy starting). Learn more about the life insurance cancellation process to explore the options. 

How long can I choose for my policy to last?

This normally depends on the provider, but at LV= you can chose for your policy to last form as little as five years to a maximum of 50 years, as long as your policy ends by your 90th birthday.

Can I have two life insurance policies?

You can take out two or more life insurance policies for a single person in the UK – there is no rule against it. In some cases it may make better financial sense to hold a single policy, but in others it might be better to have more than one if you're covering different needs, amounts of cover and lengths of time, so if your circumstances change, speak to your insurer about new policy options.

Learn more about life insurance from LV= and get a quote online today.