Understand the Basics of Life Insurance Policies

What is level term life insurance?
With level term life insurance, the amount you’re covered for stays the same (level) throughout the term (length) of the policy.

As with all term insurance, it will only pay out if you die before the policy expires. 

Level term life insurance can also pay out if you’re diagnosed with a terminal illness. Some insurers may exclude this benefit from the last 12 months of the policy term.

What is it for?
Level term is the most common type of life insurance and is designed to provide a fixed payout to your family should the worst happen to you. You set the term of the policy, the amount of cover that is paid out and also decide who the money goes to (known as the beneficiary).

How does it work?
You pay a monthly premium to the insurer. This monthly premium stays the same throughout the term of the policy. In return the insurer agrees to pay out a fixed amount of money to your family (or whoever you choose) if you were to die within a set period of time.

The amount of money is referred to as the ‘sum assured’ and the period of time is referred to as the ‘term’. Both the term and the sum assured can be set by you but will also impact the price you pay each month.

Do I need it?
If your family relies on you financially, life insurance could help make it easier for them by replacing the lost income you would have provided if you were still alive. Common reasons for buying level term life insurance include:

• To help pay for a funeral
• To pay off any outstanding debts
• To pay off a repayment mortgage
• To help maintain a child or partner’s lifestyle, education or living costs

A level term policy could leave additional money to your family as well as paying off your repayment mortgage. If you’re only looking to cover your repayment mortgage, a decreasing term policy could be cheaper.

How much does it cost?
The cost will largely depend on the amount you’re covered for and for what length of time. Your premium will also depend on your age, health, lifestyle and whether or not you smoke.

When pricing your life insurance, the insurer will try to weigh up the probability of them having to pay out and also take into account the amount of money that would be paid to your family. The longer the term of your policy and the higher the sum assured, the more expensive your cover will be.

It’s important to make sure you can comfortably afford your monthly premiums for the full term of the policy. Cancelling then restarting your policy at a later date could increase your premiums significantly

You will only pay your premiums during the term of the policy, after this your payments (and cover) will stop.

How much cover do I need?
The amount of cover is referred to as the ‘sum assured’ and is decided by you, not the insurer. This is the amount of money your family would receive if you died during the term of your policy. When deciding how much level term cover you need, it’s sensible to think about how much money your family would need to maintain their home and lifestyle if you weren’t there. As a starting point, you could try adding up the following:

• Your outstanding mortgage debt
• Other outstanding debts (e.g. car, loans etc.)
• Childcare costs
• Funeral care

How long does level term cover last?
The period of time you’re covered for is referred to as the ‘term’. The longer the term, the more expensive your cover will be (because as you get older, there’s more chance that the insurer will have to pay out).

Although the term of your policy is decided by you, most insurers will set a maximum age limit at which your policy must end.

This is usually around your 80th birthday. However this varies between companies and can be as high as 90. Whilst it’s nice to be covered for as long as possible, this can prove expensive.

The cost of your cover can be reduced by shortening the term of the policy. Think about when your dependents may be less reliant on you financially. For example, this could be when your children leave home or when the mortgage is fully paid off.

If you want your life insurance to cover you until you die (no matter what age), a whole of life policy may be more suitable, however this type of policy will be much more expensive.

Alternatives to level term life insurance
One alternative to a level term policy is decreasing term where the amount of cover reduces over time. Decreasing term cover is specifically designed to pay off a repayment mortgage, the idea being that as you pay off your mortgage over time, your need for cover also reduces. Decreasing term cover doesn’t usually leave any additional money for your family to cover other costs such as childcare or your funeral.

If you want to protect your mortgage but also provide additional financial protection for your family, choosing a level term policy may be the best option. In this case, as long as the sum assured is enough to cover your mortgage or more, your family would be protected from what is usually the largest debt (your mortgage) as well as having money to cover other expenses.

The other alternative to level term is whole of life insurance. Whole of life insurance is guaranteed to pay out. Unlike term insurance, it doesn’t expire (i.e. it has no term and runs for ‘the whole’ of your life). Because it’s guaranteed to pay out, it’s much more costly than level term cover.

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