Level term life insurance, explained
5 min read
Life insurance pays out a lump sum of money or a regular income, for a period of your choosing, to your nominated beneficiaries if you die while covered. The most common type of life insurance is level term.
Level term insurance pays out a guaranteed sum of money that is set at the point when you take out the insurance. It will never change, regardless of when you die, whether this is within a year of taking out your policy, or until the very end of the term.
It’s different from decreasing term life insurance, sometimes known as mortgage life insurance, where the sum of ‘death benefit’ reduces as the years go by. This is most appropriate for those who want to ensure their partner can meet mortgage repayments that reduce throughout the length of the home loan.
When you take out the insurance you also set the term - the length of time the policy will run. This can be anywhere from about five to 30 years.
You might, for example, opt at the age of 35 to take out level term insurance for £200,000, for a term of 20 years. That means that if you were to die at any point until the age of 55, during those 20 years, your family would receive the same sum: £200,000.
How much life insurance cover do you need?
When deciding how much cover you need, and how long you want the cover to last for, consider why you’re taking out the insurance:
- Is it to help a partner pay the mortgage if you were to die and he or she lost the benefit of your income?
- If so, perhaps think about how much longer the mortgage has to run to the end of its term, and how big that outstanding loan is
- Perhaps you want to insure your working lives, and so the term will run until your partner reaches pensionable age
- If you have children, how many years is it until they will be financially independent? Even if you do not have a paid job, it’s important to consider your time, and whether your partner, or another family member would have to reduce their workload or income to look after your children if you were to die
- Are there any financial goals you have for the future, for your family? Paying for your child’s university days, or helping them with a house deposit?
- Also think about any expenses your death may create, the cost of a funeral, for example, or any other debts that may need to be paid off.
How much level term life insurance costs you (most policies offer fixed monthly payments, or payments that rise with inflation) depends on the likelihood of your beneficiaries making a claim. In other words, statistically, how likely you are to die during the term.
The younger you are when you take out the policy, the cheaper your monthly payment. Similarly, you’ll pay less if you don’t smoke, and if you don’t have any pre-existing health conditions.
Taking out level term insurance – a few things you need to know
It’s important to accurately assess how long you’ll want to be insured for.
If you underestimate the term, or the sum, and decide to take another policy out in later life, your payments will probably be more expensive. This is because you’ll be older and more likely to have picked up health conditions.
Also be aware that the sum that you receive doesn’t change, even though inflation impacts the value of money. For example, £100,000 today will be worth more than £100,000 in 20 years’ time.
The money paid out if you die during the term of the policy is tax-free, but it will be added to your estate for inheritance tax purposes unless you put it in trust.
If your life insurance is in a trust it is not subject to probate, either, so your family will be able to get their hands on the money immediately to pay for your funeral.
Ask your insurer about writing your policy into trust; many will do it free.
Laura Whateley is a freelance writer and author of Sunday Times bestselling book Money: A User's Guide. She has written for a wide variety of publications including The Times, The Guardian, Grazia, Refinery 29, Elle, Red and Stylist.
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