Is Decreasing Term Insurance The Right Life Cover For You?

Decreasing term life insurance is a type of life insurance policy that lasts for a stated number of years, known as the ‘term’. The amount that would be paid out if a claim were made reduces each year, making it a good option for covering the balance of a repayment mortgage, as this also reduces over time and payments are made.

How does decreasing term insurance work?

With decreasing term insurance, you choose how much cover you want, and this sum then reduces each year for the length of the policy, eventually finishing at zero. In return for this cover, you pay a monthly premium to the insurance company.

The premium itself does not decline. It is set at a certain amount to reflect the overall cost of the policy from start to finish, and it then stays the same for the duration of the policy.

The idea behind decreasing term insurance is that the cover provided reduces in line with an outstanding debt that you want to pay off, usually a capital & interest repayment mortgage.

Because of the way the policy is structured, it is cheaper than a policy where the amount of cover remains constant throughout the term.

Who is decreasing term insurance for?

Decreasing term insurance is usually best-suited to those who only want to cover a specific debt.

With this type of cover, you can be confident that your loved ones would be able to clear that debt (usually a mortgage) if you were no longer around. In fact, many lenders will insist that you have a life insurance policy in place before offering you a mortgage (although you are under no obligation to buy a policy from them or their agent).

Note, however, that decreasing term life insurance is only suitable if you have a repayment mortgage. It won’t be suitable if you have an interest-only mortgage where you only pay off the interest each month and pay off the full amount borrowed in one go at the end of the mortgage term.

If you have an interest-only mortgage, you need term insurance that promises to pay out a set sum at any point during the term – a policy known as ‘level’ term insurance.

Equally, if you would prefer to have a policy that pays out enough to cover the mortgage and leave additional funds to cover other expenses, level term life cover would be more suitable.

What’s the difference between level term and decreasing term insurance?

Level term life insurance pays out a fixed lump sum to your dependants if you die within the term of the policy, whereas with decreasing term insurance the level of pay out reduces throughout the term.

Level term insurance can be the better option if you want to ensure your family would be able to pay for day-to-day living costs and household bills, while decreasing term cover may be more suitable if you only want enough cover to pay off an outstanding debt.

If you’re not sure which type of cover is best for you, it’s worth speaking to an independent broker, such as LifeSearch, who can discuss your options with you and find you the most appropriate cover.

How long should decreasing term insurance last?

It’s usually best to choose a term that lasts at least as long as the time you have left on your mortgage or other outstanding debt. So, for example, if your mortgage lasts 25 years, make sure you choose a 25-year decreasing term insurance policy.

How much does decreasing term insurance cost?

Because the amount of cover you have reduces over time, decreasing term insurance tends to cost less than level term insurance. However, the amount you’ll pay for your premiums will still depend on factors such as:

• your age
• whether you smoke
• your health and family medical history
• your occupation
• the amount of cover you choose
• the length of your policy.

Note that the older you are when you take out life insurance, the more expensive it will be. This is simply because there will be at greater risk of a claim being made – not only are your older, it’s also more likely you’ll have health issues. Because of this, it can pay to take out life insurance while you’re young.

How much decreasing term life insurance do I need?

When calculating how much life insurance you need, you’ll need to factor in how much your mortgage is currently worth as well as how much interest you’re paying. You’ll need to ensure that the amount of cover does not fall at a significantly faster rate than your outstanding mortgage debt.

What are the alternatives to decreasing term cover?

If you’re not sure whether decreasing term life insurance is right for you, you could also consider the following options:

Level term life insurance: as mentioned earlier, this pays out a fixed lump sum to your dependants should you die within the term of the policy and can be used to pay household bills and other day-to-day living costs.

Increasing term life insurance: similar to level term insurance, this pays out a lump sum to your dependants if you die within the term of the policy. However, unlike level term insurance, the amount of cover rises over time to help protect your policy’s value against inflation.

Family income benefit: rather than paying out a lump sum, family income benefit pays out a monthly tax-free income to your family if you die within the term of the policy. You could arrange for such a policy to pay out a sufficient amount to cover mortgage payments and other regular expenses.

Whole of life cover: unlike term insurance, which will only pay out if you die within a specified period, whole-of-life insurance is designed to run for the remainder of your life. This means that, so long as you keep paying your premiums, your loved ones are guaranteed to receive a pay-out when you die.

Note that premiums for this type of cover tend to be more expensive than term insurance as a claim is guaranteed. Whole of life cover is usually purchased as part of a person’s estate and inheritance tax planning.