There are a number of reasons why you should purchase life insurance. It could be to cover large debts that would cripple your loved ones should anything happen to you. Or maybe you have an army of small children, so want the peace of mind that they will be looked after and provided for in your absence. Whatever the reason, there’s undoubtedly a life insurance policy out there that can be tailored to your needs. So how do you know which one is right for you?
The simplest form of life insurance is term assurance. This is where you choose the amount you’d like to be insured for and how long you’d like the policy to last. If you die during the period of cover then the policy will be paid out to your beneficiaries. However, if you don’t die, the premiums that you’ve paid will not be returned to you. Because this type of policy effectively expires, the premiums are typically lower than those of policies that cover you for your whole life.
So, what is level term life insurance?
Life assurance can be split into two categories. One of them is level term life insurance. With this type of cover, the payout remains the same through the policy. Normally, the premiums that you pay will also stay the same.
For example, you could choose to have a policy term of 30 years, with £75,000 being the amount of cover. Then, if you die within those 30 years, you will receive the £75,000. It doesn’t matter if you die the year after you initially took out the policy, or the year before the policy expires, the payout remains £75,000.
Who is it most suitable for?
This type of life insurance policy is popular with people who have mortgages, and it is common for the policy term to cover the same length of time as the mortgage. This gives them the peace of mind that their family will be able to keep up with mortgage payments should anything happen to them.
Alternatively, someone may choose to take out a level term life insurance policy because they want to leave a certain amount of money for their loves ones. This could be an amount that specifically covers certain debts, or simply be a number of their choice.
A level term policy is also a good option for people who want a life insurance policy but don’t want to worry about increasing premiums. That’s because most level term life insurance policies come with guaranteed premiums, which means payments will stay the same throughout the entire course of the policy’s term. Other types of life assurance have premiums that can change based on numerous factors, such as the insurance market and inflation, so a level term policy is a way of protecting your cover from these external factors. This guarantee often causes people to take out policies for long terms, so they don’t have to worry about the cost of getting life insurance for seniors over 70.
Things to keep in mind
While there are many advantages to getting a level term life insurance policy, there are also some things to remember. These include:
- Because of the way level term insurance policies work, you will only receive a payout from if you die during the period of cover. This type of policy isn’t an investment, so all the money you paid over the years to the insurance provider will not be returned to you.
- You may get to the end of your policy and decide that you liked having life insurance so want to take out a new policy. This new cover will be more expensive than it would have been if you’d originally opted for that type of policy. This is because age is one of the factors that impacts life insurance premiums; the older you are, the more expensive life insurance will be.
- While it’s great to have the guarantee that your life insurance premiums won’t increase with inflation, this does mean that the value of your life insurance cover decreases over time. If you’ve taken out a level term policy to give your family a fixed sum of money if you pass away, that money may be worth less in the future, and be less of a financial cushion the later in the policy that you die.
- If your circumstances change (for example, you have a child or one of your children grows up and leaves home) then you may be overpaying on your policy. Or, you may be under insured. If the latter is the case, and you’ve chosen a policy that can’t be reviewed, you may have to take out a second life insurance policy to ‘top-up’ the amount that you want to be covered for.
What other types of life insurance are there?
If you decide that a level term life insurance policy isn’t suitable for your needs and circumstances, there are other types of cover that may be more suitable. Previously, we mentioned that life assurance can be split into two categories, and one of them is level term life insurance. The other type of life insurance is decreasing term life insurance. As the name suggests, the amount of cover lessens as time progresses. This type of policy is more suitable for debts that decrease over time, though can also be used for inheritance tax planning. However, this type of policy is also taken out for a fixed term, so if you outlive the policy you lose all of the premiums that you have paid to the insurance company. If this is a cause for concern, you can opt for a whole of life policy, which doesn’t expire. However, this type of cover is much more expensive than a term assurance policy, so you’ll need to weigh up the pros and cons of each form of cover and decide which is best for you.