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What is decreasing term life insurance?
Decreasing term life insurance is a policy type typically used to cover a repayment mortgage.
The sum assured (pay out amount) and term length is specified during the application. Once the policy is active, premiums are paid each month.
Throughout the policy term, the value of the sum assured, decreases over time.
Therefore, the further into your policy you pass away, the smaller the pay out your loved ones will receive.
As a result, decreasing term cover is ideal for protecting a repayment mortgage; as the sum assured can be set to decrease in line your remaining mortgage.
The cover amount typically reduces each month or annually depending on your policy and insurer.
Why decreasing term life insurance?
11.1 million UK homeowners rely on a mortgage in order to purchase their property.
What’s more, the average UK mortgage debt is £123,423, (source: www.finder.com).
But what would happen to the outstanding mortgage if you were no longer around?
- Could your partner afford the mortgage repayments?
- Would your family have to downsize?
- Would your family have to sell their home to meet daily living costs?
- Could your family afford household running costs?
It is a sad fact that 52 mortgage possession claims and 37 mortgage possession orders occur every day.
Having adequate life insurance in place can prevent this and ensure your loved ones can remain in the family home.
And this financial stability could cost you as little as 20p-a-day with decreasing term life insurance…
Is decreasing term cover right for you?
Whether or not decreasing term cover is right for you depends on what it is you are looking to protect and your budget.
Due to the decreasing value of the sum assured, it is not suitable for those looking to cover an interest-only mortgage.
It also may not be suitable for those wanting to cover their mortgage, as well as meet rising funeral costs or provide a fixed inheritance.
A decreasing term policy is most suitable for those looking to simply cover the balance of a repayment mortgage or provide an inheritance that will be less essential over time.
For example, if you have older children and the inheritance would simply act as a token gift rather than being essential to their financial stability.
Decreasing term life insurance is generally considered to be the most cost-effective policy type. So, if your budget is tight, it can be a very good option.
Cost of decreasing term life insurance
Typically speaking, decreasing term life insurance is the cheapest form of cover.
Decreasing term life insurance is generally more affordable compared with level term and whole of life policies, as the insurer is less likely to issue a large pay out.
The risk you pose to the insurer reduces over the policy term, allowing insurers to charge lower premiums.
As with all life insurance, the cost of your premiums will be determined by a number of key factors, including:
- The level of cover you require
- The length of the policy term
- Your age
- Smoking status
- Health and wellbeing.
Those deemed by the insurer to be more likely to make a claim will be charged higher premiums.
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Difference between level term and decreasing life insurance?
The key difference between level term and decreasing term life insurance is the sum assured.
Unlike decreasing term which reduces in value throughout the policy, level term life insurance remains fixed, (or level).
This means that regardless of what point during the policy you pass away, your loved ones will receive a fixed sum.
Due to this increased level of cover, level term cover is generally more expensive than decreasing term for the same sum assured.
As mentioned, decreasing term cover is ideal for covering a repayment mortgage as the pay out can be set to decrease in line with your remaining balance.
Level term life insurance, on the other hand, is more suitable for covering aspects which do not reduce over time. For example, an interest-only mortgage, an inheritance or funeral costs.
Decreasing term life insurance payout
A decreasing term policy provides a pay out to your loved ones if you pass away during the set term.
As a result of being term-based, it is possible to outlive your policy and your beneficiaries do not benefit from your investment.
The value of the pay out will obviously be influenced by how far into the policy you pass away.
After you are gone your beneficiaries simply need to claim on your policy in order to receive the proceeds.
If you have purchased your policy through Reassured our customer services team will happily help you through the claims process.
Joint decreasing term life insurance
Taking out joint decreasing term life insurance, as opposed to two singles policies, can save you on average around -25%.
The biggest criticism of a joint policy is that it only pays out once, (usually on the first death). This then leaves the surviving partner uninsured.
Equally, if both partners were to die simultaneously, one pay out may not be sufficient to cover to the loss of two people, (especially if you have children).
However, if the sole purpose of the cover is to pay off the mortgage, this is likely to be sufficient to meet the needs of loved ones.
If you have additional costs to cover level term life insurance may be more suitable.
Do I have to have life insurance to get a mortgage?
No. Whilst it is not a legal requirement to have life insurance in order to purchase a property with a mortgage, it is generally recommended.
Without life insurance, your passing could mean that your family would be left to repay the mortgage.
Failure to meet this cost could result in the home being sold and your family having to relocate at an already difficult time.
On occasions, some lenders will request that you have life cover in place before agreeing to release funds.
Interest rates
Whilst decreasing term life insurance is designed to cover a repayment mortgage, it is not guaranteed to cover the full balance.
In order to ensure this, it is crucial that the interest rate of your mortgage does not exceed that of your decreasing term policy.
If the interest rates do not correlate, the sum assured from your life insurance could decrease faster than your mortgage balance, meaning a pay out may not be sufficient to cover what is owed.
Insurers offer different interest rates, therefore, when arranging your policy, it is essential to compare quotes to ensure you get the right cover.
Remortgaging and decreasing term cover
Changing your mortgage can increase the amount you owe your lender and change the interest rate.
Both of these could affect the suitability of your decreasing term life insurance policy.
Remortgaging your property is a common occurrence for a number of reasons:
- To secure a better mortgage deal
- To buy a bigger property
- To acquire funds for property renovations.
Borrowing more money from a lender could mean that the sum assured you originally arranged is no longer sufficient to cover what is owed on your property.
However, most policies allow you to evoke a special events option in this circumstance. This allows you to increase your level of cover without the need for any additional underwriting.
A change of interest rate could mean that your sum assured now declines at a faster pace than the remaining balance of your mortgage.
As a result, a pay out may not provide the necessary funds to cover the remaining mortgage, if the worst were to happen to you.
Regardless of your reason for remortgaging, it is always best to get in touch with your insurer to ensure your policy still meets your needs.
It may also be beneficial to obtain a new set of quotes from an independent broker, such as Reassured, who may be able to secure you a better deal.
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Other uses for decreasing term life insurance
Whilst decreasing term life insurance is typically used to cover a repayment mortgage, it can also be beneficial in other instances.
For example, to cover other larger outstanding debts, such as credit cards and finance plans.
It may also be suitable for those with older children who do not feel a large pay out will be as essential in the coming years due to their growing financial independence.
As mentioned, decreasing term life insurance tends to be the cheapest form of life insurance.
Therefore, it is also ideal for those looking for some form of cover who perhaps do not have the budget for other forms of life insurance.
Decreasing term life insurance in trust
Upon your passing, your life insurance forms part of your legal estate, which also includes your property, possessions and savings.
As a result, any value in excess of £325,000 is subject to 40% inheritance tax (IHT), reducing the amount received by your loved ones.
Thankfully, it is possible to write your decreasing term policy in trust which will detach it from your estate.
This is a legal agreement by which you sign the rights to your life insurance over to a trustee, (similar to an executor of a will).
By detaching your decreasing term pay out from your estate, it is no longer subject to inheritance tax, meaning that 100% of its value is received by your beneficiaries.
It also reduces the overall value of your estate, minimising the amount of inheritance tax paid.
Writing your life insurance in trust also avoids probate, ensuring your loved ones receive the funds quicker.
It also allows you more control over how the pay out is received (going directly to loved ones as opposed to paying outstanding debt in your name), although this is at the discretion of the trustee.
The 3 key benefits to writing your life insurance in trust include:
- Avoid (or minimise) 40% inheritance tax (IHT)
- Avoid the probate process, (for a faster pay out)
- Have better control of your policy, (who gets the money and when).
Reassured’s free trust service
Despite only 6% of policyholders writing their life insurance in trust, it does not need to be a difficult endeavour.
It simply requires you to fill in an application form from your insurer once your decreasing term life insurance is active.
At Reassured, we offer a dedicated (free) service where one of our team can talk you through the process, supporting you while filling out the form and answering any questions.
Decreasing term life insurance with critical illness
As discussed, decreasing term life insurance tends to be arranged as protection for your mortgage.
However, statistically, you are far more likely to fall critically ill, than to die.
For an additional cost, it is possible to add critical illness cover to your life insurance policy.
This will provide a pay out if you are diagnosed with a serious, yet not terminal, illness. It is ideal for covering mortgage repayments if you were too ill to work for a prolonged period of time.
Decreasing term life insurance with terminal illness
All decreasing term policies arranged through Reassured come with terminal illness cover as standard.
This means, if you are diagnosed with a terminal illness and given less than 12 months to live, you can make a claim on your policy whilst still alive.
An early pay out can be used to pay for private medical treatment, adaptations to your home or most likely, pay off your mortgage providing you peace of mind that your family will be able to stay in their home.
Decreasing term cover through your mortgage lender
When arranging your mortgage, many lenders will provide you with the opportunity to purchase decreasing term life insurance.
Even if life insurance is a condition of your mortgage offer, it is not required that you purchase cover through your mortgage lender.
In fact, many mortgage lenders receive a commission from such sales and as a result, you could end up paying over the odds.
Comparing multiple decreasing term quotes can help you find the most cost-effective policy, which best meets your needs.
Using an FCA registered broker, such as Reassured, to carry out this research on your behalf will help you identify the cheapest available quotes.
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Decreasing term life insurance premiums can vary significantly in price.
As a result, it is best to compare multiple quotes to ensure you obtain the right cover protection, at the best price.
At Reassured, our dedicated team will compare a wide range of insurers to find you the best available quotes.
We can also answer all your questions and help you understand all aspects of the available policies, ensuring you have all the information you need to make an informed decision.
And our award-winning brokerage service is completely free to use.
Simply get in touch to arrange your decreasing term life insurance today.