Level Term Life Insurance
Introduction to level term life insurance
Level Term Life Insurance is a type of life insurance policy that pays out a lump sum in the event of death during a specified policy term.
When taking out a level term life insurance policy, you specify the sum insured (the amount you want to be paid out on death) and the policy term (length of time).
It is called 'level' term, as the sum insured (the amount paid out on death) remains 'level' for the full term. It does not decrease, as with decreasing term life insurance.
Example :
£120,000 level term life insurance over 20 years. In this example, if you took out this level term life insurance policy and maintained the monthly premium's on time and in full – the policy would pay out £120,000 if the life insured dies during the 20 year term.
Level Term Life Insurance and Interest Only Mortgages
If you have an interest only mortgage, then level term life insurance can be taken out to cover the same amount as your interest only mortgage balance, and taken over the same term as your mortgage.
Your monthly payments do not decrease the amount of your interest only mortgage, it stays the same. So this is why level term life insurance is suited.
Your interest only mortgage will be paid off in full in the event of death during the mortgage term, providing you take out enough insurance to cover your full mortgage.
Level Term Life Insurance and repayment mortgages
If you have a repayment mortgage, which does decrease as you make your monthly payment, you could still take out level term life insurance. If you set the sum insured as the initial mortgage balance amount, the policy benefit may then cover the mortgage and also leave some extra money in excess which may come in useful to cover other costs / expenses.
However, level term insurance is more expensive than decreasing term life insurance on a like for like basis – so a cost benefit analysis must be considered.
Joint Level Term Life Insurance
You can take out a joint level term life insurance if you wish. This will usually pay out on the first death during the specified policy term.
Even if a mortgage is in your sole name, and you do not have any dependents (eg. children) – you may wish to ensure that your mortgage is paid off if you die by taking out a life insurance policy. The unencumbered (mortgage free) property can then be left as an asset in your will – and any extra life cover can also be passed on in your inheritance.
Level Term Life Insurance at a glance
• Level term life insurance covers a level amount for a specified term.
• It pays out a lump sum in the event of death of an insured life during the term.
• It can be used to protect a mortgage – or can be taken out in addition to or separate from mortgage protection.
• It is a pure protection policy – there is no investment element. If death of the insured life does not occur during the specified term (i.e. the life insured survives the term), then the policy will lapse at the end of the term without ANY value whatsoever.
• It is usually more expensive than a like-for-like decreasing term life insurance policy, as the payout / benefit remains level during the term, rather than decreasing throughout the term.
Some additional options :
• You can opt to include Critical Illness Cover to a decreasing term life insurance policy. It will then pay out in the event that you are diagnosed with one of the specified critical illnesses covered by the policy, during the policy term.
• Waiver of Premium Benefit. You can pay a small amount extra (usually between 2% - 4% extra on top of your premium) for waiver of premium benefit. This benefit means that the insurer will waive the premium (i.e. you will not have to pay) in the event you are off work due to accident or illness. This means that your mortgage can remain protected, rather than the policy lapsing, in the event that you are off work due to accident or illness.
There are additional options applicable to some level term life insurance that you should discuss with your EFS adviser.
