What is decreasing term?
Life insurance is a great way to ensure your loved ones are taken care of after you are gone. As with all financial products, it comes in many shapes and sizes, and if money is already tight for you then a decreasing term policy could be a good, affordable choice.
Decreasing term life insurance is usually designed to cover the outstanding debt on your repayment mortgage in the event of your death. It is fixed for a defined period of time, known as the ‘term’.
During this term, as the amount you owe on your house decreases, so the amount your insurer will pay out decreases too. If you die within the term, your spouse, children or whoever you have chosen as beneficiary, will be paid enough money to clear the remaining debt on your home.
Decreasing term life insurance and your mortgage
Many mortgage lenders require borrowers to take out life insurance when they agree to a mortgage. For the mortgage provider, it is a good way for them to ensure they get the money paid back, even if the borrower passes away, and because they are not particularly expensive to obtain, the borrower is usually happy to have this included in their agreement.
Using the money to pay off the mortgage is not a fixed requirement if you are setting up the policy yourself. You can write the policy into trust, which means that when you die, the money is paid directly to your spouse rather than becoming part of your estate.
Your spouse can then decide if they would like to use the money to pay off the house, or if they would rather sell the house or pay the mortgage themselves, and use the money for something else.
Joint or single cover
It can be tempting to think that, when putting this insurance in place for a joint mortgage, you should logically have a joint insurance policy too. However, this is not always the case, and there are few benefits to be had from choosing a joint policy.
Pay out can only happen once, so if one of the couple pass away, the other will be left to seek out their own, individual insurance policy for the rest of their lives. As they are likely to be older by then, their new premium is likely to be substantially more than if they were to fix it now.
Joint policies are usually not significantly cheaper than two individual policies, so think carefully before deciding which is right for you. Whatever your circumstances are, our consultants will be able to provide you with a number of options to suit your needs for you to choose from.
You have the option to include terminal illness cover as part of your decreasing term arrangement. This type of cover will pay you in the event that you are diagnosed with a terminal illness and expected to die from it within 12 months.
This early payment of your insurance money can be a welcome relief to your family, as they struggle to pay the mortgage without your income and care for you at home.
As well as terminal illnesses, you can write in cover for critical illnesses too. This will pay a lump sum to your dependents in the event that you suffer a life changing illness such as going blind, having a stroke or your kidneys failing.
This can cover the mortgage from the moment of diagnosis, giving your family the room to breathe and time to come to terms with the changes to their lifestyle.
Things to consider with decreasing term:
- Only pays out if you die during the set policy term
- Cover reduces each year over the term, (often in line with your repayment mortgage balance)
- If you cancel your policy, there is no cash-in value
- Cover will end if you don’t make monthly payments
- If you have an interest only mortgage you would be better protected by level term cover
- If your mortgage interest rate goes over the relevant stated interest rate provided for in your product’s key facts document, it will not always guarantee to repay the outstanding amount.
We can help you to get instant quotations from leading UK insurance providers for your policy, helping you to secure the best and most affordable cover.
Talk to our Reassured consultants today on 0808 168 2025 about decreasing term insurance and how it could protect your family. Alternatively Start Your Quote online today.