Level Term Assurance
What is Level Term Assurance?
The Financial Conduct Authority (FCA) does not regulate taxation and trust advice.
The name says it all. It’s term assurance, as you only get a payout within the set ‘term’ e.g. 18 years. It’s level, because the payout you get is fixed from the start of the term until the end. Level term assurance is therefore designed to pay a known lump sum payout upon death within a fixed time e.g. £150,000 if you die within the next 18 years.
How Much Cover Do I Need?
The cover and ensuing cost depends on three things.
- The higher the cover the more it costs. The amount of cover should ideally take into account any outstanding debts and allow your dependants to maintain a reasonable standard of living. Do check though whether your employer provides a “death in service” benefit as this may provide a certain amount of cover already and may therefore reduce the overall amount required. Cover may also be needed for a non-working spouse or partner, especially when children are young, as if the spouse or partner died, the main earner may need to stop working. Level term is important protection for those who have children or a spouse or partner who would suffer financial loss if you died, but affordability also counts, so if the appropriate cover is too costly, it’s better to have some than none if it’s relevant.
- How long should cover last? This depends on individual circumstances, but generally a policy intended to provide for children should usually last until they finish full time education, or for a partner until the earner reaches pensionable age. Don’t feel obliged to cover a round number of years e.g. policies may be for 17 years.
- Your lifestyle can make the cost of cover cheaper. The monthly premium payable for cover is likely to increase with the likelihood of death within the term – age, health, being a smoker and having a risky occupation, can increase the price. Couples can have joint or separate cover.
As noted, couples can choose either separate policies or joint policies which pay out on the first death. However usually a joint policy would only be suitable if you needed the policy to pay out on the first person to die, as the cover would end at that point. Even if a joint policy does look suitable, it’s worth getting quotes for standalone policies anyway, which may be cheaper.
If you die the life assurance payment will form part of your estate, which increases the value of your estate. If the policy is written in trust, the proceeds go direct to the trustees for payment to your chosen beneficiaries, avoiding inheritance tax. This is relatively easy to do as most insurance policies include the option (and papers) for writing in trust directly, at no extra charge.
These types of plan will have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse.
This article (What is Level Term Assurance?) is intended to provide a general appreciation of the topic and it is not advice.