Level vs Decreasing Term Life Insurance

Once you have decided that you need term life insurance, the next question is which shape of cover to buy. The two most common choices in the UK are level term and decreasing term. Both last for a fixed number of years, both pay nothing if you outlive the term, and both are usually far cheaper than whole of life cover. The difference is what happens to the payout over time, and choosing the wrong one can leave your family with either a shortfall or a bill for cover they never needed. If you are still weighing up whether you need life cover at all, start with our overview of life insurance in the UK.

How Each Type Works

Level term pays a fixed lump sum if you die at any point during the term. Choose cover for a set amount over a set number of years, and that is the amount paid whether you die in the first month or the last. The premium is normally fixed for the life of the policy as well.

Decreasing term starts at a chosen sum and reduces over the term, usually reaching nothing at the end. It is designed to run alongside a repayment mortgage, where the amount you owe falls as you pay it down. Because the amount the insurer could have to pay falls every year, decreasing cover generally costs less than level cover for the same starting sum and term.

Neither policy builds up a cash value. If you stop paying premiums, the cover ends and you get nothing back. That is not a flaw: you are paying for protection, not saving.

Level and Decreasing Side by Side

How the Decreasing Schedule Really Works

The most misunderstood point about decreasing term is that the policy does not know what you owe. The insurer does not check your mortgage statement. Instead, the sum assured follows a schedule set on the day the policy starts, usually based on an interest rate the insurer assumes. Your policy documents should state that rate or show the schedule itself.

If your actual mortgage rate is higher than the assumed rate, your balance falls more slowly than the cover does. Over a long term the difference can become significant. Take an illustrative example with assumed values: a couple buys decreasing cover that starts at the same figure as their mortgage, and the policy assumes a lower rate than the one they end up paying after remortgaging. Several years in, the cover has dropped along its fixed curve while their balance has fallen more slowly, so a claim would clear most of the mortgage but not all of it. The shortfall would fall on the survivor.

Ask the insurer or adviser what rate the schedule assumes and compare it with your mortgage rate, both now and at each remortgage. Some people deliberately start the cover a little above the loan amount to leave a margin for this.

Matching Cover to the Job

The cleanest way to choose is to list the jobs the payout needs to do and match each one to the right shape of cover.

A repayment mortgage. Decreasing term fits, with the term matching the mortgage and the schedule checked as described above.

An interest-only mortgage. The capital does not fall until it is repaid at the end, so decreasing cover would shrink while the debt stays the same. Level term matching the loan and term is the right fit. For part-and-part mortgages, some people use a level policy for the interest-only part and a decreasing policy for the repayment part.

Family living costs. Childcare, bills and day-to-day spending do not fall on a neat schedule. Level term, sized to cover the years your family would depend on your income, is the usual choice. Some insurers also offer family income benefit, which pays a regular income for the rest of the term rather than a lump sum.

Other debts. A loan being repaid in instalments behaves like a small repayment mortgage. Many people simply fold such debts into a level policy. If existing debts are already a strain, our guide to debt solutions in the UK explains the options before you add new monthly commitments.

It is common to hold two policies: decreasing term for the mortgage and level term for the family. This is often cheaper than one large level policy covering both, because the mortgage portion is priced as decreasing cover.

Inflation and Level Cover

Level cover pays a fixed sum, but prices rise over time. A payout that would have covered your family's needs when you took out the policy may cover noticeably less years later. Some insurers offer increasing or index-linked cover, where the sum assured rises each year, usually with the premium rising too. The alternative is to review your cover at major life events and top it up with a new policy if needed, accepting that the new policy will be priced for your age and health at that time.

Life cover only pays out on death (and sometimes on a terminal illness diagnosis, depending on the policy). It does nothing if you are alive but unable to work. That risk is covered by a different product, explained in our guide to income protection insurance.

When Your Circumstances Change

Moving home, remortgaging, borrowing more or switching to interest-only can all make an existing policy a poor fit. Your options are to keep it, add a second policy for the extra amount, or replace it. Adding a policy is often simplest because the original keeps the premium it was priced at when you were younger.

If you do replace a policy, never cancel the old one until the new one is confirmed and in force. And treat the new application as seriously as the first: under the Consumer Insurance (Disclosure and Representations) Act 2012, it is your duty to take reasonable care not to make a misrepresentation to the insurer. Health changes, smoking or vaping, and new hobbies since your last application all need to be answered accurately.

Before buying through any firm, whether an insurer, broker or comparison site, use the FCA Firm Checker to confirm the firm is authorised. If something goes wrong with the sale or a claim, complain to the firm first; if you're unhappy with its response, or it doesn't reply within 8 weeks, the Financial Ombudsman Service may be able to help.

Who Receives the Money

With a joint policy, the payout usually goes to the surviving policyholder and the cover then ends. With a single policy, the money normally goes into your estate unless the policy is written in trust. A trust is a way of managing assets for people, with trustees as the legal owners who deal with the assets according to the settlor's wishes. Many insurers provide trust forms at no charge; because trusts have their own tax rules, take advice if your estate is large or your family situation is complex.

Do not count on the state to fill the gap. Bereavement Support Payment can help a surviving partner, but it depends on conditions such as your relationship status and your partner's National Insurance contributions. Support for Mortgage Interest is paid as a loan, which must be repaid with interest when you sell or transfer ownership of your home, and it requires a qualifying benefit. Neither is a substitute for a policy that clears the mortgage.

Bottom Line

Choose decreasing term to clear a repayment mortgage, and check the interest rate its schedule assumes against the rate you actually pay. Choose level term for an interest-only mortgage and for your family's living costs, and consider whether inflation will erode it before the term ends. Many households are best served by holding both. Review your cover whenever your mortgage or family changes, add cover rather than replacing it where you can, and answer every application question carefully.