Level-term life insurance is one of the simplest types of life insurance policies you can buy. In this article, I explain how a level-term life insurance policy works, the different benefits that can be included with it and when level-term life insurance is the right choice of life insurance.
How does level term life insurance work?
A level-term life insurance policy, which is also commonly referred to as level-term assurance, has two key defining features:
- The term - the duration of the policy is finite so it will only pay if the insured person dies within the term
- The cover amount - the cash lump sum that is paid out in the event of a claim remains a fixed amount until the policy ends
The lump sum that will be paid is usually referred to as the sum assured and the number of years it will protect you for is referred to as the term. However, you are not tied into continuing your life cover for the full term - you can cancel at any time. Bear in mind that you will no longer be insured by your policy if you stop paying the premiums.
Level term life insurance policies are designed to pay out a lump sum of money if you pass away during the term. Importantly, the policy accrues no value and once the term of the policy expires, there is no cash returned. For this reason, it is one of the cheaper types of life insurance policies to buy and can be a great way to create some peace of mind through periods of life when death or illness would have a detrimental financial impact on you and your dependents.
When can you claim on a level-term life insurance policy?
A basic level-term life insurance policy will include cover for death or terminal illness but you can add benefits to this type of life insurance policy to include cover for:
- Diagnosis of a terminal illness (usually included with the death benefit at no extra cost)
- Diagnosis of a specified critical illness (additional cost to include this benefit)
- Diagnosis of total and permanent disability (sometimes included if you select critical illness cover but can be an additional purchase)
Death is fairly straightforward and a level term assurance policy usually covers this event. If death happens at any point after the policy is started and before it expires, it will pay out the cash lump sum of money that was insured at the outset.
Almost all good life insurance policies include terminal illness benefit at no extra cost so that if you become terminally ill, you can claim your death payment early - terminally ill usually means that you have less than 12 months to live but it can also pay out if you are diagnosed with stage 4 cancer. If a terminal illness claim is paid then there is no further claim possible upon death. Terminal illness benefits can be very useful to alleviate financial difficulties due to the insured person's inability to work and may also provide the ability to fund any end-of-life wishes.
Critical illness insurance
Critical illness insurance can be incorporated with life insurance or you can buy it separately as a standalone insurance policy. It will pay a cash lump sum if you are diagnosed with one of the illnesses listed in the policy terms and conditions. Serious illnesses such as heart attacks, strokes and cancers can be life-changing and unfortunately, they are also statistically more likely to happen during your working life than death.
It is useful to understand that critical illness can be added to your policy in two different ways. One will pay the critical illness benefit and also potentially the death benefit while the other will pay out on either critical illness or death but not both.
According to Cancer Research UK, 1 in 2 people in the UK will be diagnosed with cancer in their lifetime.
Critical illness and death - if the critical illness insurance is included in addition to the death benefit then each can be claimed individually and the critical illness benefit does not have to be for the same value as the death benefit. Critical illness insurance costs more than life cover on its own and can be around 4-5 times the cost of the death benefit. For this reason, some people choose to arrange a smaller amount of critical illness benefit alongside the amount of death benefit they need, to satisfy their budget.
Critical illness or earlier death - using this type of policy arrangement would mean that a critical illness claim would either negate the death benefit if both values were equal or reduce it if the death benefit was higher. This is the more common way that policies are arranged.
Summary of how a level term assurance policy works
|Feature||How it works|
|Value of the sum assured||
|Terminal illness benefit||
|Critical illness benefit||
How much does level term life insurance cost?
The cost of a level-term life insurance policy is based on your age, smoker status, health and lifestyle. The cost that you will see on a life insurance quotation (perhaps from a comparison site) for this type of insurance only takes into consideration your age and smoking status. When you apply you will be asked a number of questions about your health, occupation and pursuits to determine the actual monthly premium that you will pay.
If you are healthy and there is no extra risk posed by your lifestyle choices then the monthly premium that you pay should be the same as that you were quoted.
I have outlined some sample costs based on age, and smoker status on a life insurance-only basis and then with some critical illness insurance included.
Cost of £250,000 level term life insurance over 25 years
|Age||Monthly Premium for Non-smoker||Monthly Premium for Smoker|
|25 years old||£6.03||£10.10|
|35 years old||£11.39||£22.51|
|45 years old||£25.28||£60.24|
Cost of £250,000 of level term life with £100,000 of critical illness insurance
|Age||Monthly Premium for Non-smoker||Monthly Premium for Smoker|
|25 years old||£23.94||£32.05|
|35 years old||£45.13||£73.03|
|45 years old||£101.06||£179.38|
All monthly premiums are based on guaranteed rates which would remain the same for 25 years.
Reasons to choose a level term assurance policy
There are many scenarios where a level-term assurance policy is a desirable solution. Most of our concerns to do with financial loss have a time span. Debts will eventually be paid off; children will grow up and become self-reliant, businesses will change and hopefully grow. Wherever there is a concern that an unforeseen event such as death or serious illness could cause financial hardship to a person, family or business for a specific period of time, a type of term insurance policy is likely to help create some financial security. There are sometimes very niche reasons why people buy this type of life insurance policy but here I will explain some of the more common reasons and how the policy suits the need.
Family life insurance
A level-term life insurance policy will protect your family for a set time period. If you die, become terminally ill or are diagnosed with a critical illness, you or your beneficiaries can receive a lump sum of money. This money can be used to cover the cost of immediate bills, funeral costs, replace lost income, cover living costs for dependents or just create some breathing space.
A lump sum of money can also supplement other life insurance policies that provide an income. Especially in death, we may want to ensure that our dependents will receive an income as this is what we provide in a material sense and will be missing from their lives. The lump sum from a level term assurance can then pay for the one-off costs like university fees, weddings or just a pot of money that provides security for the unexpected.
If you would prefer for your family to receive an income if you die, this can be provided through a family income benefit life insurance policy.
Debt life insurance
If any debts remain unpaid and outstanding in the event of your death, you may wish to ensure that your dependents do not become encumbered by them. Level term life insurance cover can be arranged for the amount of the debt and over the number of years required to pay it back. The shorter the period of time that you need your life insurance cover, the cheaper it is.
Mortgage life insurance
A level-term life insurance policy can protect a repayment mortgage or an interest-only mortgage. It is more suited to interest-only mortgages because the mortgage balance remains constant for the duration of its existence so a level term life insurance policy can match the outstanding mortgage over the same term. However, it is sometimes useful to use a level life insurance policy to protect a repayment mortgage too. Although the balance of the mortgage will reduce over time with a repayment mortgage, the life insurance value will remain level providing some buffer in time. This is attractive because the life insurance policy can be built upon in the future. If you were to move home and take a larger mortgage over the same term, you could maintain your insurance and arrange a top up to supplement the extra borrowing as long as you kept to the same number of years. Topping up a policy means that you retain the rate based on a younger age for the original amount of life insurance.
Business life insurance
The people within a business are often its most valuable assets. In the event that a key person within a business dies or suffers a serious illness, it is likely to cause a financial impact. Insuring such people in the business can safeguard it from suffering. In many cases a level term assurance policy is useful but there are more specific policies of a similar design that can be used for a business to protect against any such events. You can read more about them in our article "insurance policies you need to protect a business" under the headings of Keyman insurance and Shareholder partnership protection insurance.
What are the alternatives to level term life insurance?
Although a level term life insurance policy can be useful for many circumstances, there will be situations that require a different solution. Here are some alternatives and why they might be suited to you.
Mortgage/Decreasing term life insurance
If your only concern is to provide enough money if you die or suffer a serious illness to match the balance of a repayment mortgage, you may not feel that you need a level life insurance policy. The difference between level term cover and decreasing term life insurance policies which are sometimes called decreasing term life insurance policies is that the latter will reduce in line with your repayment mortgage balance. This can be a cheaper option because the amount of life insurance is reducing over time and as such, so is the liability for the insurer. This results in a cheaper monthly premium. It is often useful to obtain reducing and level life insurance quotes to work out the difference in the monthly premiums for each. At lower levels of a monthly premium, you may find that there isn't much difference so it would be sensible to go for the level cover and have a bit more cover than you need for a similar price.
Here is our article that takes a closer look at decreasing term life insurance.
Whole of life insurance
Some people do not like the fact that a level term assurance policy has a finite term to it. Although it is the most cost-efficient way of arranging life insurance during your working life, you may anticipate needing life insurance beyond this time. Some people wish to provide a nest egg for someone or fund an inheritance tax liability in the future. Others are just averse to paying for life insurance that may not return any money if you live beyond the agreed term - this would be the case with a level term life insurance. It is possible to arrange life insurance on a "whole of life" basis so that the insurance pays a benefit upon death regardless of when death happens. These types of policies are more expensive so it can be useful to obtain a quotation to compare the cost of the whole of life insurance with that of a term life insurance policy. In any case, it is wise to ensure that whichever type of life insurance you choose, is affordable and you can maintain the monthly payments over a very long period of time, potentially stretching into retirement.
Here is our article that takes a closer look at whole of life insurance.
How to arrange the best life insurance at the cheapest rates
When considering your options, you will find it useful to speak with someone. Specialist life insurance advisers can provide you with bespoke guidance. They gather your information and discuss your priorities so that you can be guided to the best options for you. Commonly, you will find the advice companies that offer the best rates for your life insurance have access to the whole market and you should try, where possible, to look for this in the company that you choose.
Good life insurance advisers will also provide you with expert guidance on how to arrange your policy in a trust. This allows you to nominate your beneficiaries and protects the payout from any potential inheritance tax. Trusts can cost upwards of £250 to arrange through a solicitor but again, a good life insurance adviser will include this in the service that they provide. And because many specialist life insurance brokers are paid by the insurance company, it normally won't cost you anything.
At Money to the Masses we have closely vetted a specialist life insurance company that provides all of the above. You can arrange a callback from one of the advisers by completing this form*. You'll even receive up to £100 cashback when you arrange your life insurance.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article - LifeSearch