Life Insurance: Level term

Level term life insurance provides a fixed sum pay-out which has been agreed at the inception of the life cover meaning it doesn’t change for inflation or for any other reason. The length of the cover is also pre agreed and the premiums remain fixed too.

Why do people take out level term life insurance?

A lot of people take out level term life insurance when they get a mortgage, which is usually the biggest debt they have over their life. Hence, shielding their loved ones from the financial obligation in case they pass away- seems like a reasonable response especially as the event is likely to be emotionally difficult already.

Typically, the term of a mortgage is 25 years and hence the life cover term is usually the same as they may not require it once they have paid of the big debt. However, this is not always the only reason people take out level term life cover, ultimately it could be any reason such as wishing to leave an inheritance for their loved ones or even helping them clear their debt. Regardless, of the rationale however, you should look into the affordability as the higher the pay-out and length of the cover, the higher the premium will be too.

Other types of life insurance

Decreasing term life insurance – The sum assured reduces over the period of the cover. As can be expected, this cover is cheaper than level term insurance.

Increasing term life Insurance – The sum assured increases over the period of the cover to account for increases in inflation/cost of living. The increment is either fixed, typically 5%, or it tracks inflation according to the Retail Price Index (RPI). This type of cover is the most expensive compared to level and decreasing term life insurance.

Family Income benefit- pays a regular monthly income from the moment you claim but only till the end of the term of the insurance policy.

As you can imagine, premiums vary widely between the different types of policies so before you make a purchase be sure that you have the right cover for your personal circumstance.

Review you life insurance

Most people have significant life events during the term of their life insurance policy so it is advisable to always review your current cover to make sure it still meets your circumstances, for example you may have a new baby and/or even a bigger home with a bigger mortgage. Hence, you may need another policy but you must be sure not to exit the old life insurance policy until the new life insurance policy is active as you may leave your family unprotected.

Moreover, the older you get the higher the premiums are likely to be, so if you need a greater amount of cover then it might make economical sense to leave the old policy intact and get an additional policy to supplement the difference.

Kevin Patterson