When planning for your family’s future, life insurance is often one of the first protection policies people consider. It helps provide financial security for your loved ones should the worst happen. However, with different types of term life insurance available like decreasing and level term policies it can be confusing to know which is right for you.
In this post, we’ll explain the differences between decreasing and level term life insurance, explore when each might be a better choice, and offer real-life examples to help you make a clearer decision. If you’re looking for protection insurance in the UK, including life, critical illness, or income protection, this guide will help you understand which option could suit your needs best.
What is Term Life Insurance?
Term life insurance provides cover for a set period, or “term.” If you die within that term, your beneficiaries receive a payout. It’s designed to offer peace of mind and financial support, minus the higher costs of whole-of-life insurance.
There are two main types of term life insurance: decreasing term and level term. Both are affordable ways to protect your family but work differently depending on your financial needs.
What is Decreasing Term Life Insurance?
With decreasing term life insurance, the amount your policy pays out decreases over time, usually in line with a mortgage or other debt you’re paying off.
How Does It Work?
Imagine you take out a mortgage of £200,000 with a term of 25 years. With decreasing term insurance, your cover starts at £200,000 and gradually reduces, typically each month or year, until it falls to zero at the end of the term matching your mortgage balance.
Why Choose Decreasing Term?
- It’s commonly used to cover a repayment mortgage.
- The premiums are generally cheaper than level term insurance because the payout reduces over time.
- It ensures your mortgage is covered, so your family won’t have this debt if you pass away.
Real-Life Example
Sarah and Tom bought their first home with a 25-year repayment mortgage of £180,000. They took out decreasing term insurance of the same value and length. Over the years, as their mortgage reduced, their insurance payout reduced accordingly. This meant their monthly premiums stayed lower than if they’d chosen level term insurance.
What is Level Term Life Insurance?
Level term life insurance offers a fixed payout amount that stays the same throughout the term of the policy.
How Does It Work?
If you choose a 25-year level term with a payout of £200,000, your beneficiaries will receive that full amount if you pass away during the term even if your mortgage or debts have decreased.
Why Choose Level Term?
- It offers financial flexibility as the payout remains constant.
- It can cover things beyond your mortgage, like everyday expenses, childcare, or future costs such as university fees.
- If your debts don’t decrease or you want added security, a level term policy is suitable.
Real-Life Example
Emma is a self-employed graphic designer with variable income and no mortgage. She wants to ensure her two children will have enough money if she dies, regardless of her outstanding debts or savings. She chooses a level term policy with a £150,000 payout for 20 years, providing constant financial protection for her family.
Key Differences Between Decreasing and Level Term Insurance
| Feature | Decreasing Term Insurance | Level Term Insurance |
|---|---|---|
| Payout Amount | Decreases over time | Remains fixed throughout the policy |
| Main Purpose | Covers reducing debts like repayment mortgages | Covers ongoing family financial protection |
| Premium Cost | Usually lower | Usually higher |
| Financial Flexibility | More limited | More flexible |
| Suitable For | Mortgage protection | Family income and future expenses |
| Policy Value Over Time | Reduces gradually | Stays the same |
Which Type of Term Life Insurance is Best?
The answer depends on your individual circumstances, future plans, and what you want your protection insurance to cover.
When Decreasing Term May Be Best
- You want to cover a repayment mortgage or loan.
- You prefer lower premiums.
- Your main concern is to clear specific debts on death.
When Level Term May Be Better
- You want to protect your family’s general financial wellbeing (not just debts).
- You want a predictable payout regardless of mortgage or debt changes.
- You want to leave money for future expenses like education or living costs.
Considering Other Protection Policies
While term life insurance offers crucial protection, many people also consider other policies for broader cover.
- Critical Illness Cover: Pays out if you’re diagnosed with a serious illness.
- Income Protection: Provides a regular income if you can’t work due to illness or injury.
These policies can work alongside term life insurance, offering peace of mind over a wider range of risks.
A Practical Approach to Choosing the Right Policy
- Assess Your Financial Commitments: List your debts (mortgage, loans) and running expenses (bills, childcare, education).
- Consider Your Goals: Are you mainly covering a mortgage or wanting to provide ongoing income?
- Compare Costs and Benefits: Shop around for quotes to see what fits your budget.
- Review Regularly: Life changes your policy should evolve, too.
Important Reminder
This blog is for informational purposes and does not offer regulated financial advice. It’s important to speak to a qualified adviser, especially about protection insurance, as everyone’s personal situation is different.
Conclusion
Choosing between decreasing and level term life insurance depends on your financial situation, what you want to protect, and your budget. Decreasing term is suitable if you want more affordable cover that reduces as your debts fall. Level term provides consistent coverage and greater flexibility but typically costs more.
Carefully considering these options can help ensure your family has the right protection insurance in place. For expert guidance tailored to your needs, speak with a specialist adviser at BSL Assured who can help you make an informed decision based on your circumstances.
Speak to BSL Assured Today
If you’re unsure which type of term life insurance or other protection policy suits you best, the team at BSL Assured is here to help. Contact us for a friendly, no-obligation chat to explore your options and secure peace of mind for you and your family.