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.

Should I get level term or decreasing life insurance?

Level term life insurance and decreasing life cover are the two main types of life insurance policies. The type of policy that you should take out depends entirely on your personal circumstances. With level term life insurance, you choose how long you want the cover to last and how much you want it to pay out. If you pass away during the policy term, your loved ones will receive the full amount. This option could suit you if you want to make sure your loved ones are financially secure in the event of your death.

When it comes to decreasing life assurance, the amount your loved ones will receive in the event of your death decreases over time. It usually holds the same value as a loan and you can set the term of your policy. Decreasing term insurance is sometimes called mortgage decreasing life insurance as it’s designed to decrease in line with your mortgage. This option is best suited to you if you want help make sure a large debt is paid off when you die.

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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