Decreasing term life insurance

Find out how decreasing term life insurance works, how it differs from other life insurance options and why you might need it.

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Decreasing term policies are often taken out to cover mortgage payments which also decrease over time. A mortgage provider may insist you take out a decreasing term life insurance policy in order to cover the payments, should you or your partner die. It’s one of the cheapest life insurance policies available because the overall amount paid out is usually lower than a policy which pays out a set amount no matter when you die.

What is decreasing term life insurance?

If the worst happens and you were to die, a life insurance policy would pay out a lump sum of money which can go towards financial outgoings, such as housing costs and household bills.

Decreasing term life insurance is usually taken out to cover mortgage repayments, although it doesn’t have to be taken out just for these. The theory is that the overall lump sum of money paid out by the insurer decreases over time, in the way in which mortgage repayments also decrease over time.

The amount of money paid out is designed to cover whatever is left of your mortgage if you were to die before it is paid off, and if you have family members who are financially dependent upon you at the time.

When you take out a mortgage, a provider may insist that you have one of these policies in place and will ask to see this before approving a mortgage.

How does decreasing term life insurance work?

When you buy a decreasing life insurance policy you will need to answer some questions about your health and lifestyle for the insurer. It will then calculate the risk of you dying within the term of the policy and the price you’re quoted will be based on this.

You will need to decide what term you would like for the policy. This means the length of time the policy is in place for, such as 20 years or until your youngest child turns 18. If the policy is in place to cover your mortgage payments, you will probably pick a term equivalent to the term of the mortgage.

Once you’ve bought the policy you’ll need to pay a monthly or yearly amount for it. This is the amount you’ll need to pay until the end of the term of the policy and if anything changes, such as you develop a new health condition, you will need to tell the insurer and this could increase the price.

During the time of the policy the amount paid out by the insurer if you were to die falls in line with your mortgage repayments decreasing.

Do I need decreasing term life insurance?

Life insurance isn’t for everyone and therefore it’s important to think about the reasons for getting it before you buy a policy. If you don’t have any dependents then there’s little reason to get life insurance, or if you have enough savings to provide cover for your family if you were to die.

However, if you were to die unexpectedly and your dependents would suffer financially to pay for things such as for a mortgage, then a life insurance policy could be useful.

Decreasing life insurance, as opposed to other types of life insurance, is slightly cheaper because the overall payout decreases over the term of the policy so it might be better suited to you if you’re on a budget.

Before you take out life insurance it’s worth checking what other policies you have in place. You may, for example, have life insurance automatically provided through your employer. If this is the case, look at the documents or ask your employer, to see how much cover you already have.

What is (and isn’t) covered with decreasing term life insurance?

If you die within the term of the policy, a lump sum payment should be made which will go towards the dependents you named when you took out the policy. However, there are some exceptions to this, which should be explained to you when you take it out.

If you die from something which you already knew about and didn’t tell the insurer, the claim may be rejected. In some cases death through alcohol or drug abuse may not be covered and suicide is often not covered for the first year of the policy. These terms will differ depending on the insurer so always check the terms and conditions before you buy to make sure you know exactly what you’re covered for.

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

Level term life insurance pays out a set amount of money no matter when you die, during the term of the policy. If the policy lasts for 20 years for example, and the lump sum is £200,000, if you die at any point during the 20 years it should pay the full £200,000 out.

Decreasing term life insurance on the other hand is a cheaper policy because the amount of money paid out decreases over time. The overall lump sum is usually less and designed to just cover the cost of a mortgage.

Am I eligible to apply for decreasing term life insurance?

Each insurer will have its own conditions for who it will sell a decreasing term life insurance policy too. Usually the younger and healthier you are, the cheaper the policy will be because there is a lower chance of you dying.

If you are elderly or you have a serious pre-existing health condition you may not be able to buy a new policy or the price quoted could be high. If this is the case you may need to speak to a specialist insurer or broker or buy a different sort of insurance.

How can I find cheap decreasing term life insurance?

There are lots of policies on the market and it’s important to take your time to find the best policy for you. A comparison website is a quick and easy way to see the prices from several different insurers but if you buy a policy this way it’s also crucial to read the small print.

You could also speak to a specialist broker or insurer but this may attract extra costs.

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

Pros

  • Your mortgage payments will be covered and your dependents won’t have to move.
  • These policies tend to be the cheapest type of life insurance.

Cons

  • The amount paid out will decrease over time.
  • The lump sum may only cover housing costs and not other costs such as everyday household bills, childcare or education fees.

Bottom line

The best decreasing life insurance policy for you will depend on your own circumstances. This includes whether you have dependents, their age, how much you’d like to leave behind if you did die, and your overall budget for paying for life insurance.

There’s not a one-size-fits-all option and it’s important to take your time to make sure the policy you’ve bought is right for you and your family.

The last thing you want is to pay out for a policy which then doesn’t provide enough cover or doesn’t pay out at all because you’ve not read the small print properly.

There are lots of insurers that offer life insurance so it’s worth comparing a few different insurers to make sure you’re getting the best policy at the right price.

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