What is decreasing term life insurance?
Published 10 January 2017 by Emily Bancroft
Is it the right type of cover for you?
When you’re thinking about life insurance, it’s easy to feel overwhelmed by all of the different terms. There are a few different options you can go for and if you don’t know anything about it, you might be worried you’ll pick the wrong one.
For example, what is decreasing term life insurance? Is this the right type of life insurance for you? It all depends if you have a mortgage and what you want to protect. We’ll take you through how it works and what else you’ll need to think about.
Decreasing potential pay-out
Life insurance breaks down into two main categories: term life insurance or whole of life insurance. Term insurance lasts for a certain number of years while whole of life will cover you until you pass away. So if you have term life insurance and you want to protect yourself after the cover has ended, you’ll need a new policy.
Decreasing term life insurance is a type of term life insurance. It still lasts a set number of years but the pay-out you’d get if you die decreases with each year.
But why would you want your potential payout to fall? Surely you’d just want your family to get as much as they could? Well, decreasing term life is all about paying off a mortgage. With a standard repayment mortgage, the amount you owe will drop every year. So if you take out a mortgage for £100,000, you might only owe £80,000 after five years.
With a standard term life policy at £100,000, you’d now be over insured. You could be paying more than you need to for your insurance. So that’s why you might want decreasing term life insurance – the payout falls in line with your mortgage.
What else to consider?
It’s generally cheaper to get decreasing term life insurance than it is to get a standard term life policy. That’s one reason why you might think about decreasing term life over other life insurance. But don’t just go for the price – you need to make sure you’ve thought of everything.
For example, will your decreasing term life policy cover you for the whole of your mortgage? If you have a 25-year mortgage, you might get a life insurance policy to cover this. But if you remortgage, your policy might end before your mortgage unless you extend it.
You also need to think about whether you want your life insurance to cover anything else. If you’d almost paid off your mortgage and you died, would you still want your family to get a larger pay-out anyway? After all, they might still have to pay for household bills, not to mention the cost of your funeral. Take a look at your expenses – you might decide you’d prefer a standard level term life policy.