When you choose term life insurance, you face another decision: level term or decreasing term. They cost different amounts and suit different needs, and choosing the wrong one can leave you over-paying or under-protected. This guide explains level term versus decreasing term life insurance and how to pick the right one.
What level term insurance is
Level term insurance keeps the amount of cover, the sum assured, the same throughout the policy. If you take out £200,000 of cover over 25 years, it remains £200,000 whether you die in year one or year twenty-four. The premiums are usually fixed too. Level term is straightforward and predictable, which makes it popular for family protection where you want a consistent lump sum available throughout the term, regardless of when a claim arises.
What decreasing term insurance is
Decreasing term insurance, sometimes called mortgage life insurance, sees the amount of cover reduce over time, usually in line with a repayment mortgage. As your mortgage balance falls, so does the cover, since the idea is simply to clear whatever is left on the loan. Because the cover reduces and the likely payout falls over time, decreasing term is usually cheaper than level term for the same starting amount.
The key difference
The core difference is what happens to your cover over the years. With level term, the payout stays the same throughout. With decreasing term, the payout shrinks over time. This makes level term better when you want a steady amount available for your family, and decreasing term well suited to covering a debt that is itself reducing, above all a repayment mortgage, as discussed in our guide to how much cover you need.
When level term is the better choice
Level term tends to suit family income protection and interest-only mortgages. If you want to leave your family a fixed lump sum to replace income, cover living costs and provide a cushion, level term keeps that full amount available throughout. It also suits an interest-only mortgage, where the balance does not reduce over time, so you need cover that stays level to clear the loan whenever a claim might arise.
When decreasing term is the better choice
Decreasing term is ideal for a repayment mortgage, the most common type, where the balance falls each year. Because you only need enough cover to clear the remaining mortgage, decreasing cover matches the falling debt and costs less. If your main aim is simply to make sure the mortgage would be paid off, decreasing term often provides exactly the right protection at a lower premium than level cover.
Cost comparison
For the same starting sum assured and term, decreasing term is usually cheaper than level term, because the insurer's likely payout falls over the years. That lower cost is a genuine advantage if decreasing cover fits your need, such as a repayment mortgage. But it is a false economy to choose decreasing term purely to save money if you actually need a level amount to replace income or cover an interest-only loan, so match the type to the need.
Increasing cover and inflation
There is a third option worth knowing about: increasing term, where the cover rises over time, usually to keep pace with inflation, with premiums rising accordingly. This helps ensure the real value of the payout is not eroded by rising prices over a long term. If you are concerned that a fixed sum will buy less in twenty years, increasing cover is one way to address it, though it costs more than level term.
Matching cover to your mortgage
If you are buying cover mainly for your mortgage, match the type to the mortgage. A repayment mortgage, where the balance falls, pairs naturally with decreasing term. An interest-only mortgage, where the balance stays the same, needs level term. Getting this pairing right means your cover would clear the loan whenever a claim arose, without you paying for more cover than the mortgage actually requires, as our guide to term versus whole of life touches on.
Decreasing cover and your mortgage rate
Decreasing term cover is calculated to fall at a rate based on an assumed interest rate. If your mortgage interest rate is higher than the rate the cover assumes, there is a chance the cover could reduce slightly faster than your actual mortgage balance, leaving a small gap. It is usually a minor effect, but it is worth being aware of, and a reason some people prefer level cover for peace of mind, even at a higher premium.
Can you change type later?
Once a policy is set up as level or decreasing, you generally cannot switch it from one to the other; you would take out a new policy instead. That means a new application at your current age and health, which could cost more. Because of this, it is worth choosing the right type at the outset, matched to whether the need is a steady amount or a falling debt, rather than expecting to change it down the line.
Matching the term length
As well as the type, the length of the term matters. For a mortgage, the term is usually set to match the remaining mortgage period. For family protection, people often choose a term that runs until the youngest child is likely to be financially independent. Setting the term to cover the whole period of need avoids the cover ending while your family still depends on it, which is the situation you are trying to protect against.
Combining policies for different needs
Some families use more than one policy to match different needs precisely, for example decreasing term to cover the mortgage and a separate level term policy to provide a steady lump sum for living costs. This can be more efficient than one large level policy, since you only pay the level premium on the portion that genuinely needs to stay level. Whether it is worth the extra admin depends on your circumstances, as our guide to how much cover you need helps you weigh up.
In most cases the choice is simpler than it sounds: a falling debt points to decreasing cover, while a steady, ongoing need points to level cover. Once you are clear about what you are protecting, the right type usually follows naturally from there.
In short
Level term insurance keeps your cover the same throughout, suiting family income protection and interest-only mortgages where you want a steady lump sum. Decreasing term reduces the cover over time, usually tracking a repayment mortgage, and is cheaper because the likely payout falls. Choose level when you need a constant amount, and decreasing when you are covering a falling debt. Increasing cover is a further option to offset inflation.
Where to get help and next steps
Read term versus whole of life for the wider choice, work out the figure with how much life insurance you need, and start with life insurance explained if you are new to it. This is general information, not financial advice.