Life Insurance: Level, Decreasing or Increasing Term?

Life insurance provides your loved ones with a financial safety net designed to help them cope with the practicalities in the event of your death. If you have life cover and pass away during the length of your policy (known as the ‘term’), your insurer will pay your beneficiaries a lump sum of money but it can sometimes be confusing to know which is the best policy for your circumstances.

There are a number of different types of life insurance, which is grouped into including term insurance and whole of life cover. Whole of life cover, often referred to as life assurance, covers you for your whole life and there’s a guaranteed payout upon your death. Term life insurance works differently and there are also different types, which we’ve explored below so you can find the right option for you.

What is term life insurance?

Term life insurance covers you for a set timeframe. A typical policy length is often between 10 and 25 years (but can be shorter or longer depending on your individual needs). You choose the policy term depending on how long you think your loved ones will need financial protection. For example, your term could coincide with the length of your mortgage repayments or provide a financial safeguard until your children reach adulthood.
Term life insurance comes in ‘level term’, ‘decreasing term’, or ‘increasing term’ life cover.

What is level term life insurance?

Level term life insurance is a type of policy where you agree on the amount of money your beneficiaries will receive if you pass away during the term. It’s called ‘level term’ because the amount to be paid to your loved ones, in the event of your death, will stay the same - or level - for the duration of the policy. Your premiums during the term will usually remain unchanged too, unless you opt for increasing cover or decreasing cover, which are explored more below.

The cover amount can help towards:

• Paying off your mortgage, debts or loans
• Paying for funeral costs
• Living costs

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What is decreasing term life insurance?

Decreasing term life insurance is a type of cover where a lump sum is paid out to your beneficiaries should you die, but the lump sum figure decreases over time. This type of life insurance is often purchased to cover a specific type of debt, such as a repayment mortgage. You will often find that premiums for decreasing term life cover are cheaper than those for a level term policy.

What is increasing term life insurance?

Increasing term life insurance is beneficial for policies that cover a long term period, as it helps counteract the effects of inflation on the value of your money. For example, if you have a policy amount of £300,000 with a term of 40 years, the purchasing power of that £300,000 would diminish over time.

This is beneficial as the value of your money will stay in line with inflation, but it also means that your premiums will also increase each year, making it a more expensive option than level-term or decreasing-term life insurance.

Your insurer will write to you each year to outline how much your policy amount has increased by, and how much your premiums have increased to reflect this, then give you the option to either accept or decline this.

Which life insurance policy is right for me?

To sum up, a level term insurance policy will pay out a pre-agreed lump sum upon your death to your beneficiaries. A decreasing term insurance policy payment decreases throughout the length of the policy and an increasing term policy will increase in line with inflation. Deciding which type of policy is right for you will depend on what you need from your life insurance policy and speaking to one of our advisors will help you to decide which policy is best for you based on your specific circumstances. You can also compare life insurance plans online and compare quotes to help you find the right policy at the right price.

How much does life insurance cost?

Life insurance premiums start at just £5 per month, though factors like the level of cover you require, your age and lifestyle factors such as smoking can raise the cost. It's a good idea to compare quotes from multiple providers to ensure your policy fits your personal needs and budget.

Are there other types of life insurance?

As well as term insurance, you may also want to look into other types of life insurance, such as whole of life insurance, which doesn’t stop at the end of a fixed term but covers you for your entire lifetime.

Thinking about your death is never easy, but making time to take stock and review your existing insurance policies can help you and your family feel reassured. You might also want to read our guide on how to talk to your family about death.

Taking out life cover can provide some much-needed reassurance and financial stability when your family needs it most - especially if you have children or a large financial commitment, such as a mortgage. It’s worth taking a look at our guide on life insurance myths to see why life cover can be invaluable.

There are plenty of policies to suit each stage of your life, whether you’re starting a family, buying a home or looking to create financial protection for dependents as you age.

Level and decreasing term life insurance FAQs

What should I know before applying?

Before applying for a life insurance quote, consider the following factors:

• Coverage Amount: How much do you want to be insured for?
• Policy Type: Do you prefer a level, decreasing or increasing term policy?
• Policy Structure: Will you opt for a single or joint policy?
• Policy Duration: How long should the policy last?
• Additional Coverage: Will you want to add critical illness cover?
• Future Changes: Are there potential changes in your circumstances?

Does decreasing life insurance get cheaper?

Decreasing life insurance does not become cheaper over time - your monthly premiums stay consistent throughout the policy term. Instead, the potential payout amount decreases. However, due to the reduced coverage over the policy's duration, this type of insurance may be cheaper for you than level term insurance, though this depends on your circumstances.

Can I cancel my life insurance?

You can cancel your life insurance policy at any time. However, once cancelled, your coverage ends, and you typically won't receive any refund of the premiums paid (unless you cancel within a cooling-off period).

Can I have two life insurance policies?

In the UK, you can have more than one life insurance policy. Having multiple policies can be advantageous if you're covering different needs, amounts of coverage, and durations, for example, you can have both level term and decreasing life insurance policies at the same time. However, it’s worth working out what you need your policy for and weighing this up against the cost of your monthly premiums. Our advisors can help you to understand what kind of coverage would best suit your specific circumstances.