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Most life insurance policies are carried out on a term basis. This simply means that it is paid into and provides coverage over a certain specified period of time. Term life insurance most often comes in one of two forms: level term insurance, and decreasing term insurance. Deciding which is the best for you is a really key step, so read on to learn how each policy works.
The essential feature of level term life insurance is that the pay-out sum will not change over the policy’s lifetime. At whatever point in the policy you pass away, and however much you have paid into it, the beneficiaries of the policy will receive the same sum.
For a level term policy, you will pay a monthly premium for your insurance, the cost of which will be determined by your particular situation and circumstances. For example, your age, health and whether or not you are a smoker will be the main determining factors. For those at higher risk, the premiums will be higher.
Level life insurance is essentially a means of protecting your family over a fixed period or number of years. You can choose how long you’d like to be covered for, and by how much; again, all of this will determine your monthly premiums. Thus, you could select a policy which covers you for 30 years and pays out £250,000 in the case of your death.
Decreasing term means that your assured sum will decrease over the course of the policy’s lifetime. Most of the nuts and bolts of the policy are much the same: you’ll pay a monthly premium based on your health and how long, and by how much you want to be covered. The main difference of course is that the pay-out sum is not fixed.
Decreasing term life insurance is typically a more cost-effective way of protecting your family’s future, as the premium costs are much lower than a level term policy. Naturally, by the end of the term, there is nothing to be paid out, and the policy ends.
Deciding which is best for you is an important choice to make, then, so read on to find out which policy could be best for your situation.
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Before deciding which policy would be best for you, it’s worth considering why life insurance is the right choice. Think about what your family would be able to afford to continue to pay without you around. Your mortgage and household bills, childcare, and general standards of living. Should the worst happen, you need security for your loved ones.
Life insurance is the way to provide financial security for those you love, and is the answer to all of these difficult questions. None of us would want to worry about financial security while we grieve, and life insurance is the best protection against that.
Doubtless the single largest debts most of us will take on in our lifetimes is our mortgage. Often, how you take out your mortgage is the most important point in deciding which type of policy is best for you, as mortgage repayments are likely to be the largest expense that will need to be covered.
If your mortgage is an interest only mortgage, for which the capital balance doesn’t decrease over time, then level term life insurance is going to be the better choice. You’ll need the amount of your pay-out to stay the same to cover the costs in the event of your death.
On top of that, the pay-out from a level term policy will leave some money leftover to pay for things like funeral expenses, childcare, and even an inheritance. Either way, essential costs are covered, and your home is protected by a payment which has stayed the same over the course of the policy.
Of course, level term policies are typically more expensive, since the pay-out always stays the same, so that is another point to consider when choosing.
The main reason why many choose to opt for a decreasing term life insurance policy is in the case that their mortgage is just a repayment mortgage, and not an interest only mortgage. In a repayment mortgage, the capital balance does reduce over time as you make more payments. Thus, your life insurance policy would slowly decrease to reflect that. Your pay-out amount decreases in line with the mortgage.
Beneficiaries of the policy would, in the event of your death, have the money to cover the cost of the mortgage. There would be little leftover for anything else, however.
For example, imagine you and your spouse own a property, with remaining mortgage payments of £200,000. In 2021, you take out a decreasing term policy that starts at a pay-out amount of £200,000. You might pay up to £10,000 a year in mortgage payments, and so your policy value would decrease in line with payments made.
Decreasing term policies are, as you might expect, usually much cheaper than level term. They are a great and cost-effective way of protecting your family home in the event that you pass away.
So, deciding which policy is right for you is a matter of looking at your circumstances and deciding what you want the insurance to cover. If you can afford the cost of a level term policy and have great costs beyond the mortgage itself to cover, then a level term policy is the best protection for your future.
On the other hand, decreasing term policies offer the same fundamental protection at a lower cost. They won’t cover everything, but if your family is covered against losing the house, then you will still have much greater peace of mind.
Try and decide what you want out of your policy, and what you’re able to afford, and make the most informed decision based on that.