Level term life insurance pays out a lump sum to your dependants when you die, helping them cope financially when you're gone.
Use this guide to get the basics on level term life insurance, and learn the best ways to get the right cover at the right price.
What is level term life insurance?
Level term life insurance - also known as level term life assurance - is a policy which pays a lump sum to your dependants if you die within a specific timeframe. A level term policy of 20 years will only pay out if you die inside a 20-year period.
Level term life insurance shouldn't be confused with whole of life insurance, which does not depend on any set term and will pay out regardless of when you die.
What's the difference between level term life insurance and mortgage life assurance?
Mortgage life assurance is bought to pay off your mortgage when you die. It's usually a decreasing term cover (and therefore often referred to as decreasing term life assurance) - the amount it pays out reduces as what you owe to your lender falls. For more on this, read the Mortgage Life Insurance guide.
In what other ways does whole of life insurance differ from level term cover?
Whole of your life cover, as the name suggests, insures you for the whole of your life and will definitely pay out when you die. As the insurer has to pay out, your premiums will be higher. Whole of life cover is is mainly used for inheritance tax planning.
What's the difference between assurance and insurance?
Assurance is for something certain to happen such as death, insurance is where there's only a risk of it happening. Some call this product insurance as there's no guarantee you'll die within the term.
Should I buy level term life insurance?
Buying level term life cover depends on your personal circumstances. If you have no dependants and are single, this cover may not be for you.
If you do have dependants, you need to ask yourself how they'd cope financially when you die. If there'd be little financial impact, then you might not need a policy. But if they would struggle, this is a cheap way to protect them
Level term life insurance: Need-to-knows
Do you feel you need level term life insurance to protect your dependants? Read on for everything you need to know before you buy.
Leave enough to cover your expenses
If you need level term life insurance, you shouldn't buy on a whim. The amount you choose to leave is a personal decision and nobody can tell you what the right figure is. Here are some useful things to consider:
Outstanding debts you want to pay off.
Outgoings your dependants would struggle to cope with.
Future spending you would have wanted to make, eg, university fees for the kids.
Any additional expenses a death might trigger, such as funeral costs.
However, the higher the payout you need, the more insurance will cost. You must balance the benefit versus the impact on your pocket.
To provide a regular income for your family, rather than a lump sum, family income benefit is an alternative life policy - it gives an annual tax-free payment for a set period, rather than a one-off lump sum.
Will I need critical illness cover as an add-on?
Be careful when selecting a critical illness policy or adding it as a feature to your life cover. The name may sound like it'll pay out if you get any serious illness and can't work. However, the policies pay out a lump sum if you get specific illnesses, which are defined by the terms of the policy. Each insurer’s list is different, long and complicated, so it’s worth seeking the help of a broker. If you want critical illness cover, speak to an adviser first.
How long should I get the cover for?
The most common reason to buy life insurance is to provide for children, so aim for it to last until they no longer need financial help. This is likely to be until they finish full-time education, whether that's 18 or 21. If you are covering a partner, it should last until they reach pensionable age.
Don't feel obliged to cover a round number of years. If you need cover for 17 years rather than 15 or 20, a policy can cover you. If you’ve got needs for varying lengths, you should get quotes for separate policies. For example, if you want to support your child past university leaving age, want to pay your mortgage in full and leave a lump sum for your partner, it may be best to get three policies to avoid being over-insured.
Admin fees on separate policies can be expensive, but some insurers will waive extra fees for multiple policies.
Single cover trumps joint cover
When buying level term life insurance, you have the choice of buying a single policy or one for a couple. A joint policy may be marginally cheaper than getting two single policies, but
once it's paid out for one of you, the other won't be covered.
If you and your partner split, you'd have to cancel the policy (unless you wanted to keep joint cover) and buy two single policies, priced on your new age and health, which would be likely to be more expensive.
But two single policies can be maintained regardless, and you also effectively have double the cover as it pays out on both deaths if you were both to die during the term.
Brokers are best for pre-existing conditions
Each insurer has its own rules on pre-existing medical conditions. If you’ve had issues, it’s worth speaking to a broker, who will know which insurers will get you the best rates.
If you're over 50 and have several health issues, an over-50s' life policy is an alternative. You won't answer any health questions and there's guaranteed acceptance up to age 80 or 85. But they're much more expensive and you can't claim in the first year or two.
Make sure your premiums are guaranteed
If your premiums are guaranteed, then your insurer will never change the price, so you’ll know what you’ll be paying over the life of the policy. Beware 'reviewable premiums' - these cost less at first, but your insurer can hike costs later on, meaning a cheap deal can potentially to become costly.
Write your policy in trust
Writing the policy in trust means you designate who you want the money to go to. It'll be paid directly to them, ringfencing it from your estate.
This means the money can't be claimed by your creditors. It also won't be liable for inheritance tax and, as it isn't part of a will, it can be paid quickly.
How do I write in trust?
This is relatively easy to do. When you get most insurance policies, they include the option (and papers) for writing in trust directly at no extra charge.
Make sure you do it at the outset. Some insurers won’t help you with it afterwards, which could mean you need to ask a solicitor for help. There are different types of trusts and they can be difficult to change or cancel, even if all your beneficiaries agree, so think carefully about who the payout will go to and get good advice from an insurance broker or a solicitor.
Stop smoking to lower your premiums
Non-smokers pay a lot less than smokers, because they're a lot less likely to die during the term. To count as a 'non-smoker', you need to have been genuinely nicotine-free for at least a year.
One year after you quit, get a new deal and you could save big. Don't be tempted to lie. If you died and it was discovered you had been a smoker, it could invalidate the policy. If you are seriously giving up, it’s a good idea to get it noted on your medical records to back up any potential claim. See the Stop Smoking MoneySaving guide.
Never rely on 'death in service' benefit
Many employees benefit from free ‘death in service’ cover through their employer. It'll pay out a multiple of your salary, usually around four times, while you are an employee. The death doesn't need to occur at work or be linked to your job, but regardless, it’s not a good idea to rely on this cover as your only life insurance.
You'll probably change jobs at some point and your next employer might not offer it. If you've had any significant health problems in the interim, you may find it expensive or impossible to arrange your own cover. The younger and healthier you are, the cheaper and easier it is to get cover.
Switch at your peril
If you already have a level term policy, this guide could help you cut the cost if you decide to switch. But there's no guarantee you'll save. If your policy was bought years ago, or you've had health problems, the savings from buying a cheaper policy may be cancelled out by your increased risk level and/or age.
If a new quote shows you can save (make sure the cover is at the same level), all you need to do is set up the new cover. Once it's in force, end your existing policy. Remember to check the T&Cs carefully.
How do I buy level term life insurance?
There are four main routes to buying a level term life insurance policy. You can use a comparison site, go directly to an insurer, use a discount broker or use a commission-based broker.
What's the difference between a discount broker and a commission-based broker?
A discount broker charges a small fee but won't get any commission. The insurer uses the money it would have paid in commission to lower your premiums, but the broker won't offer any policy advice.
A commission-based broker is unlikely to charge you a fee. Instead, it gets paid from the insurer's commission, and offers advice on policies.
What is the best route to take?
It depends how much you know about the product. A comparison site or discount broker will be good on price but short on advice. A commission-based broker. or an independent financial adviser, will likely cost more but, if you are unsure of the market, you'll be able to get advice.
Bear in mind that you can haggle with a commission-based broker. Once they have quoted you, ask how much commission they’ll make and ask if they'll sacrifice any. Many commission-based brokers also regularly check in with you, say once a year, to see if your policy still fits your needs.
Going direct to an insurer won't give you an overview of what's available, so only choose this route if you're well-versed in how these policies work, and you're sure you'll get a good deal.
If you need advice due to complicated circumstances you can also speak to a commission-based broker, who will be cheaper, or an IFA, which will cover a broader range of products.
What's the difference between guaranteed and reviewable premiums?
Guaranteed premiums are guaranteed. Once they’re agreed upfront, they can’t be changed by the insurer. But reviewable premiums can be changed by the insurer. Reviewable premiums will be cheaper upfront, but may end up being more expensive.
Level term life insurance: Best buys
Discount brokers are cheaper than comparison sites and direct players
If you don't need advice because you know what policy you want, or you don't have special circumstances, the cheapest option is a discount broker.
Instead of taking the commission offered by their provider partners and keeping it themselves, discount brokers use this money to lower the cost of your cover.
Discount brokers will charge you a fee for using their service but, even taking this into account over the life of the policy, your cover will still cost less.
Discount brokers (non-advised) over a 25 year term with £100,000 benefit
|30-year-old non smoker||30-year-old smoker||45-year-old non smoker||45-year-old smoker|
|Moneyworld (£25 fee)||£1,393
|Cavendish Online (£25 fee)||£1,393
|The Idol (no fee)||£1,476
|Other providers for comparison|
|Moneysupermarket (no fee)||£1,680
|Aviva (no fee)||£2,196
|Prices from December 2014|
If you need advice due to complicated circumstances - such as medical conditions, complex trust issues, or you want a waiver of premium (where you don't have to continue making monthly payments if you become ill or disabled) - or you are simply unsure which policy to buy, the best option is to talk to a commission-based broker.
If you want a wider view of the market and want to know how your life insurance policy fits with your other financial products (pensions, investments etc.), speaking to an independent financial adviser may be your best option.
Advised life insurance providers over a 25 year term with £100,000 benefit
|30-year-old non smoker||30-year-old smoker||45-year-old non smoker||45-year-old smoker|
|Life Assure Online||£1,866 (£6.22/mth)||£3,030
|Prices from December 2014|
Can I complain if I don't get the right advice?
Selling life insurance is a regulated activity, which means brokers have to meet certain standards set by the Financial Conduct Authority, and you can complain if things go wrong. Anyone giving advice also needs to achieve Competent Adviser Status by taking FCA-approved exams.
IFAs, meanwhile, are regulated and must pass exams on more subjects than brokers. But the costs can vary. For more information and how to find an adviser, see the IFA guide.
Always double-check the policy terms. Once you've found the best quote, check whether it's suitable. For instance, if you're a smoker, have you notified your insurer? Have you left enough money to cover your expenses? Have you made sure your premiums are guaranteed if that is what you asked for? If the cover is not suitable your loved ones may not get the payout when it is time to claim.