Level term vs decreasing term

Let’s face it, for the vast majority of us, a mortgage is likely to be the single largest debt that we’ll incur in our lifetime.

Whether you're a first-time buyer or a couple approaching retirement and looking to downsize, protecting your home is vital so not to financially burden your loved ones.

But what is the best way of protecting your mortgage?

Level term or decreasing term life insurance is an ideal way of protecting your family home.

But which one to choose?

Whether you have children and/or dependants is highly likely to impact the type of life insurance you take out.

If you don't have any dependants and only need your life insurance to cover the mortgage, then decreasing term cover may provide sufficient coverage.

However, if you're a parent and wish to leave an additional lump sum, as well as cover the mortgage, then level term may better suit your needs.

Remember, if you’ve a repayment mortgage and level term cover, the further into the policy you live and the more of your mortgage you pay off, the greater the leftover sum assured will be.

It’s completely possible to have more than one life insurance policy in place to protect different needs.

Depending on your available budget, you could have a decreasing term policy to pay off your mortgage and a level term policy to leave for your family to cover living costs.

As a general rule, level term premiums, which provide a greater level of protection, are approximately 20% dearer than decreasing term.

With decreasing term cover the financial risk to the insurer reduces over time, which helps keep monthly premiums lower, compared with level term.

However, it's important to remember there are many other factors which impact premium costs, such as your age, health, weight (BMI) and whether you smoke.

The table below shows a comparison between the monthly cost of a level term and decreasing term life insurance. This has been based on a non-smoker taking out £100,000 cover over 30 years^[1].

If you’ve some protection through your employer, like death in service, this is likely to influence the cover you take out.

For example, if you’ve 4x your annual salary paid out by your employer, then decreasing term cover may be sufficient.

Or it might be that you still require greater coverage than just covering the mortgage, however, employee benefit could impact the amount of level term cover you require.

Regardless of your individual circumstances, cover via your employer is a definite consideration you should factor into your sums.

It’s worth mentioning that it can be a good idea (and perfectly legal) to take out more than one policy to cover different aspects of your life.

It's also important to consider that if you change your employer, the death in service benefit will not move with you.

There’s also the option of adding a critical illness cover element to a decreasing or level term policy.

This would most likely cover you against conditions like a stroke, heart attack, Parkinson's disease, MS, Alzheimer’s disease and more.

However, this additional protection is likely to increase the cost of your monthly premium.

Also, check which conditions are covered by your policy, as not all cover is the same.

Getting access to a pay out early and not having to worry about money could be a massive benefit to you and your family at a very difficult time.

Generally, no.

Mortgage life insurance, whether that be via decreasing or level term cover, although a very good idea is not usually compulsory.

However, some mortgage lenders may request that you have life cover in place before agreeing to release funds, ensuring their risk is protected.

DON’T automatically buy life insurance through your mortgage lender.

From our experience, many homeowners are encouraged to take out cover either through their lender or their lenders preferred insurer.

Normally you can secure a much better deal if you compare multiple quotes yourself or use a life insurance broker.

Even if you have taken out a policy and now think you could have secured a better deal elsewhere, you can always replace it and get a new one.

This could make you a significant saving in the long-term.

Contact Reassured today to find the most cost-effective way of protecting your mortgage.