What is decreasing term life insurance?
Decreasing term is a type of life insurance, generally used to cover the debt of a repayment mortgage, if you were to die. Cover protection is fixed for a defined period of time, known as the ‘term’.
When describing decreasing term cover some insurers will refer to it as ‘mortgage life insurance‘ or ‘mortgage protection life insurance’.
During the policy term, as the amount you owe on your mortgage decreases so does the amount your insurer pay outs. This protects your family from the burden of a large debt if you were no longer around.
However, in most instances, it does not leave additional funds to also pay for future living costs or provide an inheritance.
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A decreasing term policy is usually aligned with your mortgage term, commonly 20 or 25 years. It is important to understand that you could outlive your policy, meaning your beneficiaries may never benefit from your investment.
Decreasing term life insurance is generally more affordable compared with level term or whole of life policies, as the insurer is less likely to issue a large pay out.
If you wish the pay out to cover more than your mortgage debt or require a guaranteed pay out, then level term or whole of life cover may be better options.
Why might you need decreasing term life insurance?
As mentioned above, decreasing term policies are normally used to cover a repayment mortgage.Some mortgage lenders now require you to take out life insurance before offering the loan. This ensures they get their money back if you were to die before clearing the debt.
Having this protection in place could enable your loved ones to remain in the family home and not worry about whether they afford the mortgage repayments.
Although often beneficiaries will use a decreasing term pay out to clear the mortgage, it is not a fixed requirement, (if you are setting up the policy yourself).
You may also choose decreasing term cover if you do not think a large pay out will be necessary in 20 or 30 years’ time. But that a larger sum could be more beneficial in the shorter term.
Read our blog post on decreasing vs level term cover »
Life insurance through your mortgage lender
It is important you consider where you purchase your life insurance. Often home buyers are encouraged to purchase a policy through their lender or the lenders preferred provider.However, you will probably be able to secure a much cheaper policy if you shop around and compare multiple quotes. Or you could use a reputable life insurance broker, such as Reassured.
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Additional protection for your loved ones
You may want to further protect your family by taking out a joint policy, or life cover which has a terminal or critical illness element attached.You could also maximise the benefit your family receive by writing your policy in trust.
A joint or single policy?
You have a choice to buy cover just for yourself, or for both you and your partner.Although a joint life insurance may be slightly cheaper, compared with 2 individual policies, it will only ever pay out once, (normally on the first death).
Also, if you have joint cover and your partner dies, your policy would then expire. Leaving you to re-apply for a new policy when older, which is likely to result in higher premiums.
So think about your individual circumstances and establish which cover best meets your needs. For example, could your budget stretch to 2 single policies, which would provide 2 pay outs?
Terminal illness cover
Many decreasing term life insurance policies now include a terminal illness element at no extra cost.This means if you are diagnosed with an illness which is covered by your policy and are expected to die within 12 months, you would receive a lump sum to help you/your family get through those last few months.
Critical illness cover
You could take out a life insurance policy with critical illness cover too, which would also pay out if you were to suffer a life-changing illness, (which is covered by your policy).Critical illnesses commonly covered include heart attack, multiple sclerosis, permanent disability or Parkinson’s disease.
A pay out could help replace your lost earnings or pay for any necessary home alterations required as a result of your condition.
Write life insurance in trust
You could write your policy in trust, which means the money is paid directly to your beneficiaries, rather than becoming part of your estate.Your spouse (if a beneficiary) can then decide if they would like to use the money to pay off the mortgage, or if they would rather sell the house and use the money elsewhere.
As a result of writing your policy in trust, you could avoid the lengthy probate process, meaning a faster pay out. You can also minimise the amount of inheritance tax you pay, ensuring your dependents benefit fully from your investment.
Decreasing term life insurance in summary:
Pro’s
- Often the most affordable option, (especially if you secure cover while young)
- You can fully protect your mortgage debt
- You set the term to provide cover for as long as you need
- Could allow your loved ones to remain in the family home
- Joint policy opinion, (with your partner)
- Policy can include critical and/or terminal illness elements
- Can be written in trust to help avoid 40% inheritance tax and probate.
Con’s
- Only pays out if you die during the policy term
- Cover reduces during the policy term
- If you cancel your policy, there is no cash-in value
- Interest-only mortgages more suited to level term cover
- If mortgage interest rates go up it could impact your ability to repay the debt.
Why use Reassured to secure your decreasing term policy?
- Life insurance is what we do, it is all we do
- We will scan the market on your behalf, finding you the cheapest quotes
- We have secured 1000’s of decreasing term policies for our customers
- 16,500+ people cannot be wrong! We have an ‘Excellent’ average Trustpilot rating – 9.6/10
- We are completely independent, impartial and do not charge you a fee
- There is no obligation to take out cover
- We are a non-advised broker – we just listen to your personal circumstances and find you the best quotes.