Decreasing Term Life Insurance

What is decreasing term life insurance?

Decreasing term life insurance, also known as mortgage life insurance is a type of life insurance where the payout your loved ones receive in the event of your death decreases by an agreed amount each year. Quite often, it’s bought by homeowners who want to ensure that their repayment mortgage isn’t left to their dependents when they die. It’s also taken out by people that don’t think their dependents will need such a large payout as the years pass by. For example, when your children are young and still financially dependent on you, they’ll need more money than when they’re adults and self-sufficient.

How does decreasing term life insurance work?

Decreasing term life insurance is taken out for a fixed number of years that normally matches the length of the loan, for example if you’ve calculated that it will take you 10 years to pay off your mortgage, you can take out a policy with a term of 10 years. As you reach the end of your term, the amount the insurer is willing to pay out reduces. If your policy is still in place in the event of your death, decreasing term life insurance pays out a single lump sum to your loved ones.

What are the pros and cons of decreasing term life insurance?

Pros 

  • Monthly premiums are typically lower than other life insurance policies
  • Premiums remain the same throughout the duration of the policy term

Cons

  • Typically, you only cover yourself for the cost of your loans so there won’t be much or any money left once your loans have been paid off
  • If your benefit decreases at a faster rate than the interest rate of your mortgage, you could be left with a shortfall at claim
  • Decreasing term life insurance doesn’t work for you if you have an interest only mortgage

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