When taking out a policy, there are several cover options to consider. These can include the type of policy you choose, which can 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 looking after your dependants.
In this guide, we explore two of the cover terms available, as well as looking at what each means 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. Throughout the duration of your cover, the payout at claim will remain the same, 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 will be worth less in future years.
How does level life insurance work?
Level term life insurance provides stable cover for the period you set. 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 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 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.
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. This will be your payout level at the start of your policy, but it decreases each year you're covered.
Many people choose to align their life insurance with their mortgage repayments (where they have a repayment mortgage), ensuring that the policy term lasts as long as the remaining years on their mortgage, so that if they do pass away, their family will be able to continue making payments on their home.
Decreasing life cover is usually cheaper than level term life insurance, and the monthly payments stay constant across the period of cover.
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 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 be suited to people whose financial commitments are likely to decrease in a similarly predictable way.
If you plan to make early repayments, overpayments, or underpayments or change the terms of your mortgage, then there’s a chance this policy type may not align with your loved ones’ outgoings. It’s worth noting that, as your debts dwindle, other living costs could also go up.
If your partner would need to pay for childcare without your support, then your family might benefit from cover that goes beyond mortgage payments.
Level term life insurance might be a better fit for people who don’t see their loved ones’ living costs and debts decreasing throughout the term. For this reason, level life cover can be the better option for those who rent their home or have paid off a mortgage entirely.
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.
- The policy can usually be put into trust - you'll need to speak to a financial adviser if you wish to explore this.
- Set 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, payments towards debts and mortgage payments can be taken care of.
- Decreasing life insurance cover is generally cheaper than level life insurance.
- Set monthly premiums.
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 may be cheaper than with other types of insurance, including level term.
Can I cancel my life insurance?
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, so if your circumstances change, speak to your insurer about new policy options.
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