With so many life insurance policies out there, it can be hard to know which one is right for you. In this article, we’ll be debunking the differences between level term life insurance and decreasing term life insurance to help you make an informed decision about your policy coverage.
Level-term life insurance provides a consistent coverage amount over the policy term, giving policyholders the benefit of long-term financial security. Decreasing term life insurance, on the other hand, offers coverage that gradually reduces over time, making it suitable for specific financial obligations – such as mortgage protection – where the financial need decreases as the mortgage term decreases with time.
In this article, we will be looking at:
- The key differences between level term life insurance and decreasing term life insurance
- The main advantages and disadvantages of each cover type
- How to know which cover type is right for you
Both insurance policies are useful for suiting a variety of financial goals, but, as you’ll discover, some are better suited to situations than others. Let’s get started.
Defining Level-Term Life Insurance
Level-term life insurance is a type of life insurance policy that guarantees a consistent ‘death benefit’ payout to beneficiaries in the event that the policyholder passes away within the term specified in the policy outline.
The primary purpose of level-term life insurance is to provide reliable financial protection and peace of mind during critical life periods, such as when there are outstanding financial obligations or dependents to support after the passing of the policyholder.
The key features of level-term insurance include a predetermined coverage amount that remains constant throughout the policy term and fixed premium payments, which typically do not fluctuate over the duration of the policy. This is different to some other life insurance types which may feature fluctuating rates depending on market conditions.
Defining Decreasing Term Life Insurance
Decreasing term life insurance, on the other hand, is a type of life insurance policy that provides coverage for a specific period, with the ‘death benefit’ gradually decreasing over time. The primary role of decreasing term life insurance is to align with the policyholder’s financial obligations that diminish over the policy’s duration, such as paying off a mortgage or other loans.
The specific features of decreasing term insurance include the gradual reduction of the death benefit, which typically follows a predefined schedule, making it well-suited for situations where the insured party’s financial responsibilities are expected to decrease gradually.
This makes the life insurance type useful for older individuals who are perhaps over halfway through their mortgage repayments, but this type of insurance would not be suitable for those who have just bought a house as their financial needs will typically need higher coverage for a fixed period.
Coverage Duration and Amount of Level Term and Decreasing Term Life Insurance
Level-term life insurance offers consistent coverage for a specified term, typically with a fixed coverage amount, and is well-suited for individuals seeking a stable death benefit throughout the policy duration. This is the traditional set up for life insurance, offering a lump sum upon the passing of the policyholder to help beneficiaries with any outstanding payments or end-of-life arrangements.
In contrast, decreasing term insurance provides coverage that gradually decreases over time, often aligning with specific financial obligations that diminish, such as the repayment of a mortgage or other debts. This means the policy duration will be far shorter than other life insurance types due to the declining nature of the policy.
Premium Structure of Level Term and Decreasing Term Life Insurance
The premium structure of level-term insurance will remain constant throughout the policy term, offering the policyholder predictability and stability in terms of financial planning. The benefits of level-term insurance lie in its predictable premium structure, ensuring that policyholders can budget for stable payments over the policy term.
It also provides consistent coverage, which can be especially valuable for protecting specific financial obligations or providing financial security for loved ones upon your passing.
Looking to decreasing term insurance next, the premiums associated with these policies are typically lower initially but may increase over time as the policyholder ages and the risk of payout rises. This makes it a particularly suitable option for those wanting to cover financial obligations that decrease over time, such as a mortgage.
Beneficiaries and Payouts in Level Term Insurance
The role of beneficiaries in level-term insurance involves receiving the death benefit, which is typically paid out tax-free and serves to provide financial security to the policyholder’s loved ones after their passing.
Unlike some other life insurance plans, this death benefit payout can be utilised in various ways without restriction, including settling the policyholder’s outstanding debts, such as mortgages or loans, or supporting dependents’ living expenses to ensure the continuity of their education, as well as being able to facilitate estate planning if required.
Beneficiaries and Payouts in Decreasing Term Insurance
Looking at decreasing term insurance next, the role of beneficiaries in this policy typically involves receiving a death benefit that decreases over the policy term, which is usually aligned with reducing financial obligations, such as a mortgage.
While you may no longer have children living at home, or further education expenses to cover for your dependencies, you may still have some outstanding debts such as a mortgage. This is precisely the use case for decreasing term life insurance.
This decreasing death benefit is tailored to align with scenarios like mortgage protection, ensuring that the policy covers the outstanding mortgage balance, and providing an essential safety net for the policyholder’s loved ones in the event of their passing. This will prevent the house from being repossessed or becoming too expensive to run without the main breadwinner, which can help to provide stability during an unstable time.
Understanding how the death benefit aligns with decreasing term insurance can help individuals recognise its critical role in addressing specific financial needs that decrease over time, ensuring that families are financially secure, even as their financial obligations diminish.
Advantages and Disadvantages of Level Term Insurance
Level-term insurance is known for its consistency and simplicity, offering reliable, long-term financial protection for beneficiaries. This death payout is incredibly versatile in nature, catering to various financial needs which can range from family protection to income replacement, as well as acting as a safety net to cover end-of-life expenses upon the policyholder’s passing.
One key benefit of level-term life insurance is its predictability, as the fixed premiums make it easier for policyholders to plan their budgets without worrying about fluctuating costs. The steady coverage amount ensures that beneficiaries receive a stable and substantial payout, providing them with the necessary financial support during difficult times – this is important to note, as some other life insurance plans can be impacted by the current market conditions which can cause fluctuations in premium costs.
Level-term insurance can act as an effective estate planning tool, allowing policyholders to ensure that their loved ones’ financial security and well-being are taken care of even after they are no longer around. However, its relatively higher premium payments compared to decreasing term insurance could be a drawback for those seeking more budget-friendly life insurance options.
Advantages and Disadvantages of Decreasing Term Insurance
Decreasing term insurance is highly lauded for its cost-effectiveness and suitability for scenarios involving decreasing financial obligations, such as in the case of mortgage payments. It ensures that specific debts, like mortgages, are paid off in the event of the policyholder’s passing, reducing the financial burden on those left behind.
Decreasing term insurance can be an excellent option for individuals who are looking for a more affordable life insurance solution, particularly during times when their financial commitments are high, such as when raising a family or paying off loans.
While decreasing term insurance offers certain advantages, it also comes with a few limitations. One notable drawback is the decreasing coverage amount, which may not align with all financial needs – it won’t be a suitable coverage option for those with long-term mortgages, or who have just bought a house, for example.
As the policy’s coverage diminishes over the policy term, it might not adequately account for potential increases in financial obligations or unforeseen circumstances. Additionally, the decreasing nature of the coverage might not provide the same peace of mind and long-term financial security as a policy with a consistent coverage amount, such as traditional life insurance.
The drawback to taking out traditional life insurance will be the cost barrier for some individuals, as premiums are likely to be higher than those associated with decreasing term life insurance, for example.
Scenarios for Choosing Level Term Insurance
Let’s now consider a few use cases where level-term insurance may be beneficial to take out. For individuals with long-term financial goals, such as providing consistent financial security for their dependents and ensuring comprehensive estate planning, level-term insurance can be a great option.
This insurance type is also well-suited for those seeking to maintain a stable coverage amount over a specified term, allowing policyholders to secure their loved one’s financial well-being in the long run, instead of just a short-term patch, which can ensure that their families and dependents are well-protected and financially secure over an extended period of time.
Scenarios for Choosing Decreasing Term Insurance
Now, let’s take a look at use cases for decreasing term insurance. As we have already mentioned, this life insurance type is particularly well-suited for individuals with financial obligations that gradually decrease over time, such as mortgage payments or other specific debts.
Decreasing term insurance serves as an effective option to ensure that financial obligations are adequately covered in the event of the policyholder’s passing, providing a safety net for individuals and their families during critical financial periods. This can be useful for those considering not just their immediate but also their evolving financial needs in the future, ultimately ensuring comprehensive financial protection throughout various stages of life.
Level-term and decreasing-term life insurance both offer distinct approaches to varying financial requirements. While level term insurance provides consistent coverage with a fixed death benefit throughout the policy term, decreasing term insurance is specifically designed to align with decreasing financial obligations, ensuring that coverage decreases over time as the need is reduced.
Whichever route you choose, it’s crucial that individuals carefully evaluate their specific financial circumstances and long-term goals to determine which type of insurance best suits their needs. By understanding the differences and similarities between these two options, individuals can make informed decisions that provide comprehensive financial protection and peace of mind for themselves and their loved ones.