Decreasing-term life insurance can help you to ensure there are no mortgage repayment worries left behind for your family when you die.
What is decreasing term life insurance?
Designed to help protect a repayment mortgage or similar debt, decreasing-term life insurance can pay out a cash sum in the event of your death or if you’re diagnosed with a terminal illness.
When taking out decreasing life insurance you will be covered for a fixed period or ‘term’. You pay premiums either monthly or yearly, and the total amount the policy will return decreases over that period. When you reach the end of your policy the pay-out will be zero.
The length of the term will normally correspond with the remaining balance on your repayment mortgage, meaning you will have cover in the event of your death and the remaining mortgage can be paid. The plan may need to be adjusted if you make any further mortgage arrangements.
Decreasing-term life insurance is often far cheaper than standard insurance as the nature of the policy makes it less expensive for insurers.
Decreasing-term vs level-term cover
While decreasing-term is ideal for those looking to ensure that they are covered for the total remaining sum of their mortgage repayment in event of death, it isn’t the ideal solution for everyone.
Level-term insurance pays out a pre-agreed fixed sum to a nominated benefactor in the event of the policyholder’s death. This means that any mortgage repayments or other debt will not be directly covered and it is up to the person who receives the insurance to decide what to do with it.
Level-term life insurance is beneficial to those who have minimal debt and wish to leave their loved ones a cash sum when they die.
Decreasing-term is best for those who wish to be covered for the remaining mortgage repayment on their home, so that loved ones can cover the balance of their home when they pass away.
Mortgage life insurance
While similar to decreasing-term life insurance in so much as the total amount of cover reduces over time in line with the mortgage repayments, mortgage life insurance differs in that the total amount paid out will go directly to the mortgage providers.
This means that the remaining balance due on the mortgage will be covered but doesn’t offer the same flexibility as decreasing-term insurance for paying other debts.
Decreasing term life insurance with critical illness cover
Like all other life insurance policies, it is possible to add critical illness cover to your decreasing-term life insurance plan.
Critical illness insurance will cover you against falling seriously ill, offering a tax free sum to help cover financial commitments.
It’s important to note that your premiums will rise due to the extra level of insurance. If you’ve taken a decreasing-term insurance policy due to the low cost involved it may not be beneficial to get critical illness insurance added on.
Who is decreasing term life insurance for?
As well as being a great option for those looking to have a stable mortgage repayment insurance option that will always cover the amount in line with how much is being paid on the mortgage, decreasing-term policies may also be great if you’re starting a family.
As your children grow and become self-sufficient, the size of the pay out they would need in the event of your or your partner's death may decrease. A decreasing-term plan will insure there is always enough to cover them whilst still offering lower premiums than level-term plans.
It is worth noting that decreasing-term life insurance is not suitable if you have an interest only mortgage. As the capital debt, that is the amount you initially borrowed, is only repaid at the end of the mortgage term, and decreasing insurance won’t cover you for the full amount.
As the amount you’re covered for decreases over time it is important to check that the level of interest you are paying on your premiums is in line with how much your cover will depreciate versus your outstanding mortgage debt.