Level Term Assurance

“A life insurance policy where the amount your dependents will receive, does not change over time. Usually for people who want to protect their family or to pay off an interest only mortgage.”

Level Term Assurance is also known as Life Term, Term Level or Term Life Insurance.

If we look at it word-by-word…

  • Level simply means the amount of life insurance that gets paid out if you die remains the same when ‘insurance’ is used throughout the life of the policy.
  • Term means the length of time the policy is live; it will only pay out if you die within the term.
  • Assurance is a bit like insurance but there is a difference. ‘Assurance’ is used when the event that triggers a payment is guaranteed to happen, like death. So in the case of death, which is guaranteed to happen at some point in the future, ‘assurance’ is used. However, when you insure your car or home, there’s a good chance you won’t need to claim and a payout is therefore, never made.

This is an example…

So, a Level Term Assurance policy for a sum assured of £100,000 over a 20 year term would pay out £100,000 if the insured person were to die within the next 20 years. If they lived longer than 20 years then no payout would be made. If they died one day after they took the policy out, the payout would be made.

What else do you get?

These policies have absolutely no cash value at any stage, it doesn’t matter how much you pay in and how long you do it for; they don’t have a surrender value, a maturity value or any kind of value for that matter. You, or your dependents, won’t get anything back unless you die within the term.

This may sound like a waste of money, nothing back after paying in for so long. However, it’s the cheapest option.

A non-smoking male aged 35 can get £100,000 life cover over 20 years for £7.17 per month*.

If you think about it from the insurer’s perspective, if you died after paying just one premium and they paid out, it will have cost them £99,992.83 and they certainly wouldn’t get that back.

When may Level Term Assurance plans be appropriate?

People who have an interest only mortgage always owe their mortgage company the amount they initially borrowed. Therefore, someone who wanted their interest only mortgage to be cleared if they died would be most suited to a Level Term Assurance policy.

That said, there’s no problem if some has a Level Term Assurance plan to pay off a reducing or repayment mortgage. It would mean, on death of the insured, the mortgage will be cleared and there’ll be extra cash for their dependents.

A couple may want to leave a lump sum if they were to die before their dependents grow up, perhaps a deposit for a house or to help them start a business. A Level Term Assurance plan may be the right kind of policy for this. Remember the effects of inflation though: The average house price in the UK today is about £238,000, the average in 1970 was £5,650! You can usually opt for the payout to be ‘Index Linked’ where it’s designed to keep up with inflation.

People often pick a round number such as £100,000 or £250,000 and assume that it’s more than enough cover. Job done. This isn’t very sensible; if you sit back and work out how much your dependents would actually need, it’s almost always more than you think, you’ll probably want to clear the mortgage but what about an income for your family after that? There are other cost effective policies that may help you, such as ‘Decreasing Term Assurance’ and ‘Family Income Benefit’.

In summary…

For someone that wants a fixed amount of cash to be paid if they were to die within a predetermined timeframe, then Level Term Assurance may be appropriate. * Based as our most recent calculations