Level term or decreasing term life insurance?

Level term life insurance pays out the same amount whenever you die during the policy. Decreasing term life insurance pays out an amount that falls over the term, usually tracking a repayment mortgage as the balance comes down. Both are types of term life insurance, and both pay a lump sum only if you die within the term. If you live to the end, there is no money back.¹

The practical difference is cost and fit. Decreasing term is usually the cheapest of the three main forms of term insurance, because the payout falls over time. Level term premiums are constant but more expensive than decreasing term cover, because the payout stays the same size throughout.³

Which one suits you depends on what the money is for. A repayment mortgage, where the balance drops each month, is the classic case for decreasing cover. An interest-only mortgage, where the balance does not fall, is the classic case for level cover.²

Level term pays the same amount whenever you die

With level term insurance, the payout your loved ones receive remains level throughout the term of the policy. The amount paid out stays the same throughout the policy term, providing an agreed lump sum on death. It does not matter whether you die in year two or year twenty: the figure is fixed at the start.¹

That fixed payout is what you are paying for. Level term policies pay out the same amount if you die at any point during the term, and the premiums stay constant, but they are more expensive than decreasing term cover because the payout remains the same size.²

Level term is the more flexible of the two. Because the payout does not shrink, it can be pointed at any need that does not reduce over time: an interest-only mortgage, school fees, a lump sum to clear debts, or simply an amount your family would need to replace your income for a period. The lump sum paid out after death stays the same no matter how much time has passed, which is why it suits an interest-only mortgage.⁴

One thing level term does not do is keep pace with inflation. Any payout does not increase with inflation, and level term cover is usually more expensive than decreasing life insurance and does not go up with inflation. Over a 25 or 30 year term, a fixed sum buys less in real terms than it did at the start.⁸

If keeping pace with inflation matters more than a fixed figure, increasing cover is the alternative. Increasing term starts at the same price as level term cover, but the payout is designed to rise.³

Decreasing term cover falls broadly in line with a repayment mortgage

Decreasing term means the amount paid out decreases over the life of the policy, usually to match a decreasing debt such as a repayment mortgage. The cover amount normally goes down in line with your mortgage as you pay it off.²

The mechanics are straightforward. Your cash sum decreases roughly in line with the way a repayment mortgage decreases, though the premiums stay the same. Each year the potential payout decreases, because the policy is meant to be used with a mortgage where the outstanding loan decreases over time.⁵

Decreasing term cover is usually linked to a large debt such as a mortgage. You set the payout size and the term to match the debt, and the cover falls as the debt falls. It is also known as mortgage cover or mortgage insurance, and it is designed to help pay off reducing debts such as a repayment mortgage.²

A worked example shows how the numbers move. A policy is taken to cover the cost of a repayment mortgage at £250,000. After the first year of repayments, the amount owed has fallen to £234,000, and the cover has fallen broadly in step.⁷

The important limit is that the payout tracks an assumption, not your actual mortgage. If your circumstances change, the two can drift apart. That is covered below.

Cost: decreasing term is usually cheaper

Decreasing term life insurance is usually cheaper than level term life insurance, and it is usually the cheapest option among the main types of term cover. Because the payout falls over time, this tends to work out as the cheapest of the three main forms of term insurance.³

The reason is simple: the insurer expects to pay out less, on average, the longer the policy runs. Decreasing term life insurance tends to be cheaper than level term insurance because the payout is decreasing, and premiums on this type of policy are typically less expensive than they are on a level term policy.⁷

Level term sits in the middle. Level term life insurance is generally a little bit more expensive than its counterpart, decreasing term insurance, and cheaper than whole life insurance. Whole of life is a different product with no fixed end date, covered separately in whole of life insurance explained.¹³

What the premium buys also differs by provider and by your own circumstances. Age, health, smoking status and the size and length of the cover all feed into the price, which is why two people asking for the same £250,000 of cover can be quoted very different figures. How insurers work this out is set out in how life insurance premiums are worked out.

Covering a mortgage: which type fits which loan

The match between policy and loan is the heart of the decision. Decreasing term cover is designed to help pay off reducing debts, such as a repayment mortgage, and it is suited to repayment mortgages where the cover needed reduces over time.¹¹

A repayment mortgage is the natural fit. You owe less each month as you pay down capital, so the amount of cover you need falls too. Decreasing term takes that into account. The term is set to the same as the mortgage, say 25 years, and the sum insured should match the amount you owe at the start.¹¹

An interest-only mortgage is the opposite case. The balance does not fall during the term, because you are only paying interest, so cover that shrinks would leave a gap. A level term insurance policy will not decrease over time, which is well suited if you have an interest-only mortgage.¹¹

The same logic applies to other debts. A loan that reduces as you pay it can be matched with decreasing cover. A debt that stays at a fixed amount, or a need that does not shrink, points towards level cover. For more on matching cover to a home loan, see mortgage life insurance.

Policy terms: typically 5 to 50 years

Term policies are designed to cover a specific period, often 10 to 30 years, though some insurers offer cover stretching from five years all the way up to 70 years.³

Decreasing cover tends to sit within a narrower band. You can choose both the starting amount of cover in money and the term, from 5 to 50 years. The minimum length of the policy is 5 years, and the maximum length is 50 years.⁶

The term should follow the debt or the need. If your mortgage runs for 25 years, a 25 year term means the cover and the loan end at roughly the same point. A term that ends early leaves the last years of the mortgage uncovered; a term that runs long means paying premiums after the debt has gone.

Some policies are shorter by design. One provider's term life policy has a term of 5, 10, or 25 years. The right length is a question of when the need ends, not a fixed rule.¹⁸

What happens if the mortgage and the policy drift apart

Decreasing cover falls at a rate the insurer assumes. Your actual mortgage balance can move differently, and when it does, the payout and the debt stop matching.

Three things commonly cause drift. A change in your mortgage interest rate alters how quickly the balance falls. Overpayments reduce the debt faster than the policy assumes, so the cover may end up higher than the balance, which is not a problem in itself. A payment holiday or a switch to interest-only for a period slows the reduction, so the debt can end up higher than the cover.¹¹

The policy pays what it says, not what you owe. If the payout is less than the outstanding mortgage when you die, the difference falls to your estate, and the home could be at risk unless there is other cover or savings. That is the risk to weigh against the lower premium.

There is a wider point about how much cover people hold. The length of cover, or term, is the same as your mortgage, 30 years for example, and the sum matches how much you have borrowed, which is how mortgage protection is normally structured.²⁰

Combining cover, and joint policies

You are not restricted to one type. Cover can be arranged as level term, decreasing term, increasing term or whole-of-life cover, and providers commonly offer level, decreasing or increasing term insurance as options within one product.²²

A couple can also split the need across two policies. One worked example has a couple with a £250,000 mortgage and children taking joint decreasing term life insurance of £250,000 alongside joint level term life insurance of £250,000, giving a total of £500,000 if both die. The decreasing policy tracks the mortgage; the level policy covers the family need that does not shrink.²⁴

Joint cover pays once, on the first death, and then ends. That is a key difference from two single policies, which can pay twice. How joint cover works, including what happens after a relationship ends, is set out in joint life insurance explained.

Where the protection stops

Both types of cover are term insurance, so both share the same limits. There is no payout if you live to the end of the term, and no cash-in value along the way. The policy pays only on death within the term, subject to the terms and any exclusions.

If the insurer fails, protection depends on the Financial Services Compensation Scheme. The rules and limits are set out in is my life insurance protected if the insurer fails?. If a claim is turned down, the Financial Ombudsman Service can look at complaints about most policies bought in the UK.

Free, impartial help on protection and mortgage questions is available from MoneyHelper, the government-backed guidance service. If a mortgage is at risk because of debt, StepChange and other debt advice charities offer free help, and the options are set out in debt: a complete guide to help, solutions and your rights.