Decreasing Term Life Insurance

Large debts, such as a mortgage, are one of the key factors that influence many families to seek life insurance cover. If you (or your partner) were to suddenly pass away, how would you ensure that your mortgage payments, and other debts, are taken care of?

Read on to find out how Decreasing Term Life Insurance Works and how it can help protect your family.

What is Decreasing Term Life Insurance?

One of the more popular life insurance products is Term Life Insurance Cover. These policies can run for 10, 20 years or more. You choose the length of time you are insured and the sum of money you would like assured as a payout. A decreasing term life insurance policy works like a term life insurance policy, only the sum insured will reduce over the length of the insurance term. The reductions may reduce on a monthly or annual basis, depending on the provider.

These products are designed specifically to work in alignment with a mortgage loan. Over the length of a repayment mortgage term, the amount you owe will steadily decrease. This means if you were to die during the length of your mortgage term, a decreasing term life insurance policy will cover only the amount that remains on your mortgage payment. Therefore, it is worth noting that this type of insurance is not designed to offer your will beneficiaries a lump sum to enjoy. The payout will go straight to your mortgage lenders to cover your debts.

As these products run for a set term, in most cases, once the term of your policy has concluded, your loved ones will receive no funds if you were to die. However, they will have the mortgage of your property taken care of.

Please Note: Decreasing Term Life Insurance policies are more suitable for repayment mortgages, rather than interest only plans. This is because the bulk of the repayment funds need to be available towards the end of the mortgage term. And with this type of life cover, the sum assured decreases over time.

Do I Need Decreasing Term Life Insurance?

  • If you are on a strict household budget, this type of life insurance can protect your mortgage payments.
  • With all insurance products, you will need to look at your amount of outstanding debts, living expenses and funeral costs you may wish to cover. This will determine the sum you would like paid out to your beneficiaries, should you die during the policy term. Your premiums will also be determined on your age, occupation, level of health and lifestyle habits, as well as your family’s medical history.
  • Decreasing term life insurance can also be used to insure for things such as university education and other personal debts.

Let’s Look at a Decreasing Term Life Insurance Example:

Theo and Cara have just taken out a £240,000 mortgage and are looking for a way to protect their payments in the event of one (or both) of them die.

The mortgage term is 25 years and they are looking to cover themselves with life insurance for that term. As they are a young couple (26 and 27 years old), just starting out, they look at decreasing mortgage insurance.

After 23 years, the couple have paid off most of their repayment mortgage, their payout would be expected to cover just £10,000 left on their mortgage.

What are the Benefits of Decreasing Term Life Insurance?

  • Cheaper Than Level Term – In many cases, Decreasing Term Life Insurance premiums can be cheaper than taking out a level term life insurance product. This may be especially true in the months before your policy term ends. This is because the risk to the insurer is minimised as the term progresses, so any resulting payouts would decrease over time.
  • Mortgage Requirements – Depending on the mortgage lender you choose; a form of insurance may be a requirement for acceptance of the loan. If you are looking to get a mortgage and need to keep your costs down (at least temporarily), a decreasing term life insurance policy can be an affordable way to protect your mortgage.

What are the Pitfalls of Decreasing Term Life Insurance?

  • Limited Cover – The aim of this type of insurance is to cover your mortgage debt. Although, it can be taken out to protect other forms of debt if you wish. For this reason, decreasing term life insurance may not be suitable for those who want leave provisions for their loved ones’ other living expenses.
  • Changing Circumstances – Life insurance tends to get more expensive the older you get, in many instances. Decreasing term cover may suit your circumstances now, but what if your life changes? For instance, you may have a child after taking out the policy and may want more comprehensive cover as a result. In which case, a Decreasing Term Life policy, may not be enough to protect your child’s quality of life, if you were to suddenly die.
  • Term Only PayOut – Like with all Term Life Assurance, you can only make a successful claim for the length of time you are paying towards the policy. This means that if you took out a 20-year decreasing term policy and died in the 21st year, your family would receive no payout. Despite you having paid into the policy for two decades.

What are the Alternatives to Decreasing Term Life Insurance?

  • Level Term Insurance – Paying for a term policy, where the sum assured stays the same for the length of the term, may be preferable to a decreasing term policy. When the payout remains the same for the life of the policy, your family would be able to pay off your mortgage, with the possibility of having some leftover funds to cover their other living expenses.
  • Whole of Life Assurance – If you are looking for a policy which will guarantee a payout upon your death, then you may want to look at Whole of Life Insurance. Here the sum assured will not decrease in line with your mortgage, it will stay the same. You will also have to pay towards premiums until you die or become very elderly (some insurers cut off at 90 years old, as an example).

If you would like to speak to an independent life insurance broker about decreasing term life insurance, get in touch. They can offer you free advice and a no-obligation life insurance policy quote.

I needed life insurance and critical illness for myself and my wife. I got a number of quotes from some of the big brands and was very happy with the final price. Mike Davidson, Birmingham

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