Level vs. Increasing vs. Decreasing Life Cover: Which One’s Right for You?
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. You should always seek professional advice from an appropriately qualified adviser.
All contents are based on our understanding of current legislation, which is subject to change, any information provided here is only correct at the time of posting.
Life insurance is often the cornerstone of financial planning, providing peace of mind and financial security to loved ones in the event of death. However, the variety of policy options can be overwhelming. In this blog, we’ll explore the three primary types of life insurance - level, increasing, and decreasing policies, along with their uses, pros, and cons. We’ll also consider real-life examples to help you better understand when each type might be appropriate.
1. Level Term Life Insurance
A level term policy offers a fixed sum assured throughout the policy’s duration. This type of policy is straightforward, with premiums typically remaining constant.
When It’s Used:
To provide a lump sum for dependents, covering general living expenses, or paying off fixed debts like interest-only mortgages.
Example:
John and Sarah have an interest-only mortgage on their home. It has 20 years remaining and they plan on downsizing at the end of the mortgage term to repay the outstanding borrowing amount of £250,000.00. In this scenario, they take out a 20-year level term policy for £250,000.00 on a joint-life basis, ensuring that in the event of either of their deaths during the policy term, the mortgage balance would be repaid in full, providing financial security for the surviving party.
Pros:
• Simple to understand.
• Predictable premiums and payout.
• Ideal for fixed financial obligations.
Cons:
• The payout doesn’t account for inflation, meaning its real value decreases over time.
2. Increasing Term Life Insurance
An increasing policy adjusts the sum assured annually to counteract inflation, typically linked to the Consumer Price Index (CPI) or by a fixed percentage.
When It’s Used:
• For long-term financial needs that may grow, such as covering rising living costs or future education expenses.
Example:
Emma and Jack are parents to two young children. They anticipate that their family’s financial needs will grow over time due to inflation and rising costs for education, living expenses, and future university fees.
To protect their family, they choose an increasing life insurance policy with a sum assured that rises by 3% annually. This ensures their cover retains its value, helping to fund their children’s future education or provide long-term financial security in the event of an untimely death.
Pros:
• Maintains purchasing power over time.
• Suitable for rising expenses or future liabilities.
Cons:
• Premiums typically increase annually according to the providers pre-determined escalation rates i.e. one and half times the increase in the sum assured, potentially becoming expensive over time
• May provide more cover than needed, increasing costs unnecessarily. There is no guarantee the policy will remain suitable over the long-term
3. Decreasing Term Life Insurance
A decreasing policy reduces the sum assured over time, typically aligned with a repayment mortgage or other decreasing debts.
When It’s Used:
• To cover liabilities that reduce over time, such as a capital repayment mortgage
Example:
Tom and Rachel purchase a 20-year decreasing term policy for £200,000 to match their repayment mortgage. As they pay down the mortgage, the cover reduces, ensuring the debt is cleared if either of them passes away.
Pros:
• Lower premiums compared to level or increasing policies.
• Ideal for specific liabilities like mortgages.
Cons:
• Doesn’t provide additional financial security beyond covering the liability.
• Unsuitable for non-decreasing financial obligations.
· As the risk of dying becomes greater with old age, the sum assured payable reduces
Importance of Seeking Advice and Regular Reviews
Choosing the right life insurance policy isn’t a one-size-fits-all decision. Factors like your age, family situation, debts, and long-term goals all influence the best type of cover.
Additionally, life changes such as having children, changing jobs, or buying a new property may render your existing policy unsuitable. Regular reviews ensure your policy remains aligned with your financial needs.
A suitably qualified financial adviser can:
• Help assess your current and future financial needs.
• Recommend the most appropriate policy type.
• Compare premiums and providers to find the best value.
Conclusion
Understanding the differences between level, increasing, and decreasing life insurance policies is crucial for making an informed decision. Each policy type serves a specific purpose, and the right choice depends on your individual circumstances.
To ensure your life insurance policy continues to meet your needs, seek professional advice and review your cover regularly. Life evolves, and so should your financial protection. If you’d like guidance, get in touch with a financial adviser who can help tailor a solution for your unique situation.
It is important to note that any term assurance (life policy with a specific term) will end with no cash in value. There is no guarantee of any return, apart from in the event of a claim. This does help keep the premiums low. It is also worth noting that once the plan ends, if your medical history has changed, it may not be replaceable.