Deciding what type of life insurance policy you wish to purchase is an important task yet with numerous types of policies available it can also be a very confusing one. Some of the types of life cover available nowadays include decreasing term insurance, whole of life cover, over 50’s life insurance, and level term insurance.  With such a wide choice, it is of the utmost importance that applicants understand what they are buying and what will be the best product to suit their own particular needs.

Two of the most common types of cover are level and decreasing term insurance both of which will pay out a tax-free lump sum in the unfortunate event that the policyholder dies within the term of the policy.  However, these are two very different types of insurance policy and as such it is important to understand the distinction between them.

Level term life insurance very simply, will pay out a guaranteed sum assured should the policyholder die during the term of the policy.  A £100,000 level term insurance policy will always pay out that amount should a claim be made during the life of the policy.

Decreasing term life insurance, like level term, covers you for a set period of time and pays out a lump sum if you die during the policy term.  The key difference is that the amount of cover will decrease over the term of the policy. As such, if you take out a £100,000 decreasing term insurance policy and a claim is made in 10 years time, it will pay out only whatever portion is remaining. It is usually designed to tie in with the outstanding amount on a repayment mortgage and consequently is often referred to as Mortgage Protection or Mortgage Life Insurance.

The year on year reduction in cover makes this a cheaper option than straightforward level term insurance yet although the life cover will reduce over time, the monthly premium will remain constant over the term of the policy.

With both level and decreasing term insurance policies you can add on additional options, like critical illness cover. If you do add on critical illness cover, the plan will also pay out on diagnosis of a qualifying critical illness as well as if you die during the period of the policy.

If you simply wish to ensure your mortgage will be paid off in the event of your death, then the cheaper option of decreasing term assurance may well be sufficient.  If however, you have dependents whose financial well-being you wish to secure then level term option could well provide greater peace of mind since your beneficiaries will receive the guaranteed lump sum should the worst happen.