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Decreasing term life insurance

Ellie Austin-Williams
Written by Ellie Austin-Williams

Decreasing term life insurance is a type of life insurance which can provide financial protection for your family if you pass away. This life insurance policy can give you the peace of mind that your family will have enough money to pay off a specific outstanding debt, typically a mortgage, in the event of your death.

What is decreasing life insurance?

Decreasing term life insurance provides your family with a cash lump sum if you pass away during the term of the insurance policy. The term of the policy is the set period of time during which the policy is active.

As you can tell by its name, the key feature of decreasing term life insurance is that the amount of cover provided decreases throughout the policy term. To reflect the fact that the policy value decreases over the term, decreasing term insurance is often cheaper than other types of life insurance. 

Decreasing term insurance is also known as mortgage protection insurance, and for good reason: it is commonly used to cover a specific debt, most often a mortgage. 

When you purchase a property, it is usually a requirement that you have life insurance before a mortgage provider agrees to lend to you. This gives your lender security that if you pass away during the mortgage term, your family can afford to repay the outstanding mortgage.

Decreasing life insurance explained

Mortgage protection insurance typically provides cover for a specific debt if you die during the policy term. If you have a repayment mortgage, the amount of money that you owe the mortgage lender will decrease over time as you repay the borrowed amount of money.  

Decreasing term life insurance cover reflects the reducing amount of outstanding mortgage debt over the policy term. As the amount you owe on your repayment mortgage decreases, the amount of policy cover also goes down. The amount of life cover will reduce either on a monthly or yearly basis. 

It is common to purchase decreasing term life insurance for a term equal to the length of your mortgage, which is most commonly 25 years. A life insurance policy equal to your mortgage term gives you the security of knowing that if you pass away in this time, the insurance policy will pay out enough money for your family to remain in your home.

Is decreasing life insurance right for me?

Whether decreasing term life insurance is the best option for you will depend on your individual circumstances. The most suitable life insurance policy will depend on your personal requirements. For this reason, it's important to consider all the available options before you take out a policy.

There are a number of advantages to decreasing term life insurance. These include:

Lower monthly cost

Decreasing term life insurance premiums tend to cost less than level term life insurance policies. This is because the structure of a decreasing term policy means that amount of cover you have reduces over the policy term. For this reason, decreasing term insurance can be a more cost-effective option for life insurance. 

It provides mortgage protection

With decreasing term insurance, you have the security of knowing that your family can pay off the mortgage if you die during the term of the policy. This is often the biggest financial burden faced by a family and it can be reassuring to know that the mortgage will be taken care of if the worst happens.

You can take out more coverage than just the mortgage 

Depending on your mortgage, certain life insurance providers may offer you the option of a decreasing term life insurance policy which provides more cover than your mortgage. This can help your family to cover additional expenses rather than covering only the mortgage if you pass away.

There are also some disadvantages to a decreasing term life insurance policy. 

Before deciding to take out a decreasing term policy, it’s important to make sure that you are aware of the downsides to this type of life insurance:

The policy reduces in value

Unlike level term life insurance, which pays out a fixed lump sum of money on the death of the policyholder, the value of a decreasing term policy reduces over the policy term.

It may be less convenient

The decreasing value of the policy leaves little flexibility to use any pay out to help cover other living costs in the event of your death. This can leave your family in a difficult financial situation at a distressing time, particularly if you are the primary earner. If you wish to ensure a lump sum payment, it may be worth exploring other life insurance options.

The premium remains the same for the full term

Although the value of a decreasing term policy goes down over the policy term, the monthly premium remains the same. This means that you will continue to pay the same premium on a monthly basis for the term of the policy to benefit from the policy cover. 

Should I choose level term or decreasing term life insurance?

The best life insurance option for you will depend on a range of factors. This will include your current financial situation, your family circumstances and the level of cover that you need. 

The main difference between level term life insurance and decreasing term life insurance is the amount of cover provided in the event of your death. 

For this reason, it's worthwhile to consider the primary purpose of your life insurance policy. This way, you can determine which type of policy best suits your needs.

When you take out level term life insurance, you decide the amount of cover you want and how long you want the insurance to last. You pay a monthly premium and if you pass away during the term of the insurance policy, your family receives the full amount of cover as a lump sum payment. 

The lump sum amount doesn’t change throughout the term of a level term life insurance policy.  For this reason, the monthly premium is typically higher than the cost of a decreasing term policy.

With decreasing term life insurance, the value of the cover equates to the value of a specific loan, which is most often a residential mortgage. If you have a repayment mortgage, the amount you owe decreases over time as you make monthly repayments. As the outstanding mortgage reduces, the value of decreasing term insurance goes down. This typically continues until the mortgage is repaid, at which point the value of the cover is zero.

Are there other types of life insurance to consider?

Level term and decreasing term insurance are the most common types of life insurance. However, there are other life insurance options that you can consider to make sure that you choose the best option to protect you and your family.

Critical Illness Cover

Decreasing term life insurance provides financial help for your family if you pass away during the term of the policy. However, decreasing term and level term life insurance policies only cover death and not serious injury or illness. To protect yourself financially in the case of serious illness, consider critical illness cover. 

Critical illness cover can give you the comfort of knowing that you and your family are able to meet any outstanding financial commitments if you become critically ill. Critical illness cover is a type of life insurance that pays out a one-off, tax-free lump sum to help with the financial impact of a serious illness. This can include loss of earnings, healthcare support or other expenses. 

Joint Life Insurance

If you’re married or in a civil partnership, you can consider a joint life insurance policy. Joint policies cover both you and your partner under one life insurance policy. Typically, joint life insurance pays out only once, on the death of the first partner. It can ensure the surviving partner is financially comfortable for the rest of their life.

Over 50s Life Insurance

If you’re aged 50 or above, you can choose to take out specific over 50s life insurance. One benefit of over 50s life insurance is that it will guarantee a pay out when you pass away. This can help your family with funeral costs and expenses, rather than having to deal with finances in a difficult and emotional time. 

How to choose the best decreasing term life insurance 

The best way to find a suitable decreasing term life insurance policy is to carry out research. Consider the level of insurance cover that you need and then carry out a policy price comparison. This way, you can determine the best option for your specific needs and find a policy that gives you the best cover at the most cost-effective price. 

The price of decreasing term life insurance will depend on a number of factors. An insurance provider will take into account your current age, along with a range of lifestyle and health information. Your family medical history, as well as whether you are overweight or a smoker, are all factors which can affect your insurance premium.

As with any type of insurance policy, take the time to complete the policy application in full and be sure to check that you qualify for the policy. Remember to disclose all existing health conditions and lifestyle choices, such as whether you smoke. 

Make sure that all of the health and lifestyle information is accurate. Not disclosing medical conditions and providing accurate information risks invalidating your insurance policy.

What is level-term life insurance?

25th August 2020