Level term life insurance

Advantages of level term insurance

Essentially, level term cover offers a degree of certainty. If you die during the policy term, you know exactly what your beneficiaries will get.

The pros:

• You know exactly what the payout amount will be
• It’s can provide financial support for your family or loved ones
• It can help cover things like future living costs or education expenses

Disadvantages of level term insurance

There is a risk that midway through your term’s policy you won’t need the same level of cover you required at the beginning. This means it’s worth reviewing periodically.

The cons:

• It’s usually more expensive than decreasing term cover
• You might end up with more cover than needed later in the policy term

Advantages of decreasing term insurance

Decreasing term life insurance can be useful for a very specific situation – namely covering a debt which you pay off over the policy term.

The pros:

• Premiums tend to be lower
• Designed to match repayment mortgages and reducing debts

Disadvantages of decreasing term insurance

The main disadvantage is that it’s limited in its purpose. For this reason, many people choose to have both types of cover – decreasing term for a repayment mortgage, level term for a payout which helps the family with other things.

The cons:

• The payout becomes smaller over time
• Might not provide enough money for wider family protection needs

So, in summary:

• Level term insurance is often chosen for family financial security
• Decreasing term insurance is typically used to protect a repayment mortgage

How much does level term life insurance cost?

The cost of cover depends on several factors, including:

• Your age
• Your health and medical history
• Whether you smoke
• The amount of cover you choose
• The length of the policy term

Generally, younger and healthier applicants expect to pay lower premiums.

One advantage of taking out cover earlier is that you can lock in lower premiums. Otherwise your age or changes to your health could potentially increase the cost.

Find out more about how much life insurance costs.

Should I add critical illness cover?

You’ll usually have the option to add critical illness cover to a level term policy.

Critical illness cover pays out if you’re diagnosed with a specified serious illness, like:

• Heart attack
• Cancer
• Stroke

This means the policy could provide financial support during your lifetime. It can also give you valuable peace of mind if an illness or condition means you’re unable to work.

Adding critical illness cover will increase the cost of your premiums, but it could be worth it if you value the extra protection.

Is level term insurance affected by inflation?

Yes, and this is an important consideration.

A payout of, say, £100,000 today might not have the same spending power in 20 years due to inflation.

Because of this, it’s a good idea to:

• Review your cover every few years
• Check whether your payout amount still reflects your family’s needs

Some policies also offer inflation-linked cover, although understandably this can increase premiums over time.

What about tax?

But are life insurance payouts taxable? The good news is that the lump sum payable to your family is usually free from:

• Income tax
• Capital gains tax

However, it might be subject to inheritance tax (IHT) if the payout forms part of your estate.

Some people choose to place their policy in trust to help reduce potential inheritance tax issues. Also, because you don’t have to wait for probate, this can speed up payouts to your beneficiaries.