Decreasing term life insurance
Key takeaways
- Decreasing term life insurance is usually designed to cover a repayment mortgage, with the payout reducing over time as your mortgage balance falls.
- Monthly premiums normally stay fixed throughout the policy term, and cover is often cheaper than level term life insurance.
- It may suit you if you mainly want to protect your mortgage balance, rather than leave a fixed lump sum for your family.
What is decreasing term life insurance and how does it work?
Decreasing term life insurance is a policy where the payout amount reduces over time, usually in line with a repayment mortgage.
The main features are:
- The cover amount decreases gradually, either monthly or annually
- Monthly premiums stay fixed throughout the policy term
- The policy pays out if you die during the term
The idea is that as your mortgage balance reduces, the amount of cover you need also falls. This means you’re not paying for cover you may not need.
What is the difference between a decreasing term and a level term?
The main difference is how the payout changes over time:
Decreasing term insurance – the payout reduces over the life of the policy
Level term insurance – the payout stays the same throughout
Both types usually have fixed monthly premiums. Level term policies usually cost more because the insurer’s potential payout stays higher throughout the policy.
Some people might still prefer to get the extra cover that comes with level term life insurance because, with time, it should be able to cover more than just the outstanding debt.
The payout from a level-term policy might be able to cover extras like funeral costs and clearing any other debts or just giving your family some money to spend.
That’s why it’s important to think about your circumstances before choosing a policy.
Find out more about the different types of life insurance.
Why is decreasing term insurance a cheaper option?
Decreasing-term life insurance is often cheaper than level term cover.
That’s because:
- The potential payout reduces over time
- The insurer’s risk decreases as the policy progresses
This lower risk is reflected in lower monthly premiums, making it an affordable option for many homeowners.
What is a decreasing life insurance policy best used for?
Decreasing term life insurance is most commonly used to protect a repayment mortgage.
If you die during the policy term, the payout can be used to:
- Pay off the remaining mortgage balance
- Help your family stay in their home
It can also be used for other loans that reduce over time, although it’s primarily designed for mirroring mortgage protection.
How to choose the amount and length of cover
To get the right level of protection:
- Set the policy term to match your mortgage term
- Choose a starting cover amount equal to your outstanding mortgage
This helps keep your cover in line with your remaining mortgage balance.
What happens if my mortgage rate or payments change?
Your mortgage can change. This might happen because of:
- A new interest rate
- Switching lenders
- Overpaying
- Extending your term
In these cases, your insurance might no longer match your remaining balance. If your circumstances change, it’s best to review your policy to make sure the cover still meets your needs.
Can I add critical illness cover to a decreasing policy?
Yes – many insurers allow you to add critical illness cover for an extra fee.
This means the policy could pay out if you’re diagnosed with a serious condition, such as:
- Cancer
- Heart attack
- Stroke
The policy usually pays out once - either after diagnosis or death - and then ends.
What are the risks of a decreasing term policy?
The main risk is that the payout reduces over time.
It may not suit you if you want to:
- Provide a fixed lump sum for your family
- Cover expenses like funeral costs or day-to-day living costs
It’s best suited to covering debts that decrease; it’s not designed for broader financial protection.
What factors affect the cost of decreasing term life insurance?
The cost of your policy will depend on things like:
- Your age
- Your health and medical history
- Whether you smoke
- The length of the policy term
- The amount of cover you choose
In general, younger and healthier applicants tend to pay lower premiums.
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