Level Term vs Decreasing Life Insurance

By Vicki Coleman

When it comes to life insurance, there are a number of different ways to go about getting cover. But, as we all know, having too many options can be confusing, leaving people to dodge taking out a policy.

So, let’s simplify.

For most people, particularly those who have a mortgage, it comes down to whether you want a level term or decreasing term policy.

Both have their pros and cons – it’s up to you, with a bit of help from us, to work out which option is right for your individual circumstances.

What’s the main difference between the two?

You might have worked this out already from the name of the products alone.

The main difference is that with level term life insurance the payout sum remains fixed throughout the lifetime of policy, whereas for a decreasing term it reduces over the policy term.

As you might expect, level term insurance tends to be more expensive than decreasing term. But why would you want your payout to decrease as you get older?

Decreasing term life insurance

Let’s answer that question straight away. Decreasing term life insurance actually makes a lot of sense when you think about it.

A decreasing term life insurance policy is a cost-effective way of covering a repayment mortgage where the outstanding debt reduces over time.

The cover is put in place to ensure that in the event of your death, your beneficiaries would receive enough to pay off the mortgage.

For many families, mortgage repayments are their biggest outgoing every month. This is why so many life insurance products are geared towards ensuring beneficiaries are adequately covered.

Level term life insurance

Level term life insurance can also be used to pay off an existing mortgage, but the fixed payout means that there might be some money left over for other expenses such as funeral costs and household bills.

However, this very much depends on your finances when the policy is activated. For example, if you’ve been on an interest-only mortgage for years, the payout might not cover the outstanding debt.

If you die outside the agreed term, there will be no payout.

Of course, nobody can – or indeed wants – to pinpoint the exact point at which they die. So, if you’re relying on an insurance payout to provide for your beneficiaries, you need to ensure the term length is long enough to cover the rest of your life.

What happens if you outlive your policy?

Life insurance is put in place to ensure that the people you’re leaving behind aren’t put under financial strain from your death.

But it’s possible to outlive your policy – if it’s not renewed, there would be no payout. This isn’t necessarily a problem, but it depends on the health of your family’s finances.

If you’ve paid off the mortgage and have built up some savings, you might’ve secured the financial future for you and your family.

If you’ve taken out a decreasing term life insurance policy – and it’s been matched to your mortgage repayments – if you outlive the cover, you and your family will be mortgage free for the rest of your life.

The problems can come when you outlive your life insurance policy and you still have outstanding debts as you enter your latter years. You can renew at this point, but you have to expect higher premiums as you’ll be deemed a greater risk by insurers.

Who knew that living a long and healthy life could prove such a conundrum?

Which product is best if you have children?

Having children is a game-changer, and that includes your choice of life insurance.

Most likely, you’ll want to opt for a policy that means that they can live comfortably if you’re no longer around to provide for them.

That brings us back to decreasing term insurance, which will only provide you with a payout that covers the mortgage debt. Whilst this will undoubtedly go a long way to easing the financial burden, it might not solve it entirely.

However, if you're a parent and leave a lump sum that goes beyond just covering the mortgage, then the level term may better suit your needs.

When you become a parent and/or a homeowner, you have newfound responsibilities, you can learn more about life insurance at key events in your life in this article.

If you’ve taken out repayment mortgage and level term cover, the further into the policy you live and the more of your house you pay off, the greater the deficit between the payout and the outstanding debt is.

Let’s put it more plainly: your beneficiaries will have more money to play with.

Can you buy both products?

If your budget will stretch to more than one life insurance product, there’s nothing stopping you taking out a decreasing term policy to pay off your mortgage and a level term policy to leave a lump sum for your beneficiaries.

But before you go ahead and splash the cash on multiple life insurance policies, it could be worth speaking to an expert who can take you through your other options. Our experts can explain everything from whole life insurance to critical illness cover.

It’s also worth checking if your employer offers you any kind of protection in the form of death in service. For example, if your employer is contractually committed to providing your family with a payout (up to five times your salary) in the event of your death, then decreasing term cover may be sufficient.

Compare life insurance level and decreasing term quotes

As a place to start, it’s good to generate some quotes to understand what your budget will get you. Different people have different risk mindsets, and our experts are trained to match policies to individual needs.

At QuoteSearch, we’re happy to get as many quotes that you need so that you can make your mind up. We don’t have any favourite suppliers – the quotes that you see are comprehensive and competitive.

So, don’t be shy in requesting quotes for different types of cover – that’s what our experts are paid to do!

If you're not sure if life insurance is for you, we've also covered the top 3 alternatives to life insurance.

To compare your free life insurance quotes from leading providers, click here.