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Level term, decreasing term – what’s the difference?

21st September 2020

Level term and decreasing term are both types of life insurance. In essence, the main difference between them is that the former will pay out a single lump sum in the event of your death, whilst the latter is paid out in proportion to the remainder of a specific loan, like your mortgage. Still confused? Read on to find out more about the differences between level term and decreasing term life insurances. 


What is level term life insurance? 

As mentioned, level term life insurance policies pay out a fixed lump sum in the event that the policy holder dies within a set period. The sum to be paid out is established when setting up the policy, and is one of the factors that affects the size of the premium. Other factors include the health of the policy holder, any risks inherent risks they represent (i.e a particular job), and the period of time they wish to cover. 

The benefit with level term life insurance is that the payout remains the same regardless of when the policy holder passes away. This means that the beneficiaries would receive a larger payout than with a decreasing term policy, if the holder dies towards the end of the policy period. 


What is decreasing term life insurance? 

A decreasing term life insurance policy is designed to meet the liability of a specific loan in the event of the policyholder’s death. This means that unlike the level term life insurance policy, the potential payout decreases over time in line with the remainder of a loan. If a policy holder passes away towards the end of their mortgage period, for instance, their insurance should pay off whatever is left. Whilst this type of insurance might leave beneficiaries with less cash, it’s generally a cheaper, more targeted policy aimed at covering a specific loan. 


Which is better? 

Neither policy is objectively ‘better’ than the other. Which one is right for you depends entirely on your desires and financial situation. A level term policy is more expensive but guarantees a set amount within the policy period, whilst a decreasing term policy is cheaper but pays out less and less as the period progresses. If you’re not sure which is most suitable for you, we’d recommend speaking to a professional financial advisor – they’ll work to help you understand your finances and purpose the most suitable insurance products to meet your needs. 


Want to learn more about life insurance? Read our previous articles on how to choose the right type of life insurance for you, and how to calculate the amount you need to insure

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