Level Term Life Insurance Explained

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By Crispin O'Toole-Bateman

on Friday 30 August 2019

Family smiling in their home

Understanding life insurance terminology seems overwhelming, but here at Unite Life we have no interest in bamboozling you – far from it!

We believe that making the right decision comes from understanding exactly what your options are, so relax while we explain everything there is to know about the most common life insurance product in the UK.

What does level term insurance mean?

Level: not moving.

In this context, level refers to the sum assured (which is a fancy way of describing the payout). It’s level in that it remains the same throughout the life of the policy.

Should your insurance ever need to pay out then the amount your beneficiaries would receive is exactly the amount you opted for.

This differentiates it from decreasing term life insurance and index-linked, or ‘increasing’ term life insurance.

Term: an amount of time.

Term simply means a period of time. In this context, it is used to indicate that the insurance policy has a start date (when your application is processed) and an end date (of your choice).

During the term (between the start and end dates) you are insured and the policy will pay out in full if you die. Outside the term (before the official start or after the end), you will not be insured and the policy will not pay.

Insurance: an arrangement where a provider guarantees financial compensation in the case of a loss in exchange for payment of a premium.

That’s a bit more of a mouthful, but essentially insurance is merely an agreement between you and the insurance company that should the thing you are insuring against occur (your death, in this case), they will pay an agreed amount (the sum assured). In return, you agree to pay premiums, either monthly or annually.

Insurance is sometimes called assurance. Though the terms have a sightly different technical meaning, they are generally interchangeable. For this reason, level term insurance is often confusingly shortened to LTA (level term assurance).

Level term insurance: an agreement for between yourself and the insurance provider that should you die during the defined period, a set payout will be paid to your beneficiaries.

How does level term life insurance work?

Insurance is about risk.

The insurer is hoping that they never have to pay out, so the more likely it is that they are going to have to, the larger they will make the premiums, and the less likely it is, the cheaper the deal will be.

For this reason, taking out an insurance policy at 75 years old and suffering from ill-health is a lot more expensive than a ten year level term policy purchased by a healthy 25-year-old.

It’s simple risk assessment.

Term life insurance has a huge risk mitigator built into it – the policy can end before you die. This is in contrast to whole of life insurance which runs literally until the end of your life – it’s guaranteed to pay out so the premiums have to reflect that.

Term life insurance is consequently very affordable.

You can insure yourself for large sums with very reasonable premiums. In fact, we advise people to look at assured sums equal to five times their salary as a baseline. It’s often hundreds of thousands of pounds, offered for monthly premiums that are typically below £50.

Simple maths suggests that if the term policy is for 20 years and is paid at £50 per month, the most the insurance company will take in income is £12,000 (£50 x 12 x 20), yet it will pay out many hundreds of thousands of pounds. This is only possible because most people will outlive their policy.

Outliving your term life insurance is a win-win scenario. You win because you are still alive. Your insurance company win because they made £12,000 (or however much your policy is worth).

It’s a good thing, because during the term, you had the peace of mind of knowing that should the worst happen, your family’s home and life were secure. The mortgage would have been paid, the bills covered and the children able to grow without financial struggles.

What happens when a term life insurance policy matures?

Historically, policies existed that were part life insurance, part savings, and part investment.

These policies were complicated to understand and off-putting but had the side advantage of paying back something when the term was over. It made the policyholders of the time feel that their money wasn’t ‘wasted’.

Today’s life insurance customer is generally more worldly wise and understands that if they want to invest money, there are better ways to do so, and that the service provided by life insurance is enough in itself and doesn’t need complicated bonus schemes tagged on to make it valuable.

Consequently, though the term ‘matures’ still exists, it means little in this context except ‘ends’. When a term life insurance policy ends, you no longer make payments and you are no longer insured. It’s a clean end.

What is level term life insurance best for?

Level term life insurance is an excellent product for your middle years, while you are responsible for the huge financial commitment of a growing family.

Set with a term until your youngest child reaches maturity, a level term policy can provide security for your whole family until they are old enough to provide for themselves.

The payouts can be impressively large to keep your family going for many years in your absence, and the premiums are structured to be very affordable, scaled (like the payout) to your income.

Which is better – term or whole of life insurance?

Whole of life provides a superb product for those in retirement to ensure they leave something behind when they die – no matter when that is, but the relatively high premiums (due to the heavily increased risk) make it unsuitable for the kind of significant payout most level term policies cover.

As with other life insurance products, both level term and whole of life are best when tailored to your personal circumstances.

Finding out more about the best level term life insurance with Unite Life

Level term life insurance is one of the primary life insurance products for working men and women in the UK.

For more information on it, including the advantages and disadvantages of term life insurance, how you can get additional products such as level term life insurance with critical illness cover, or the benefits of index-linking, look to our library of articles here on the Unite Life website.

At Unite Life we work with a huge array of top UK insurance companies to bring you the best life insurance in the UK.

For level term insurance quotes that are significantly lower than the average life insurance cost for the country, contact us today. You can fill out our contact form or simply pick up the phone!

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