What is Decreasing Term Life Insurance?
Decreasing term life insurance is a type of life insurance that covers you for a fixed period of time. Once your policy reaches the end of its term, your insurance expires. Unlike some other forms of term insurance, the benefit amount (the lump sum paid out in the event of a claim) decreases over time. If you die within your chosen term, your loved ones will receive your benefit amount. If you outlive your policy term, your cover will end and you will no longer pay premiums.
But why would anyone want a life insurance policy that gets smaller over time? Well, this kind of cover could be ideal for someone looking to cover their family if they have a repayment mortgage since this kind of loan also decreases over time. As your outstanding debt decreases over time, so does your need for a large insurance policy. You might even find that your mortgage lender insists that you have a life insurance policy in place before you’re granted the loan.
What’s the difference between decreasing term insurance and mortgage protection?
You might be confused about the difference between decreasing term and mortgage protection insurance, but when it comes down to it, there are many similarities. Families with mortgages often take out decreasing term cover to help protect their loved ones from outstanding mortgage payments in the event of their death.
Bear in mind, if you have an interest-only mortgage, decreasing term insurance may not be suitable since the money you originally borrowed is only repaid by the end of the mortgage term. But not to worry, there are always other term life insurance options that you can consider in this situation.
Who needs decreasing term insurance?
If you’re worried about your family’s ability to keep up with mortgage payments if you die, decreasing term insurance could be the right choice for you. Decreasing term insurance is often popular with people who have mortgages. Mortgage holders can work out how long it will take to pay off their mortgage and how much they will still owe in X amount of time. These figures can then be used to choose a suitable benefit amount that will help cover the outstanding mortgage costs in the event of your death.
People with financial dependents
Likewise, if you have any financial dependents who you would like to protect for a specific period of time, decreasing term insurance could be a suitable option. For instance, if you have children, it might be a good idea to work out how much they would need to get by if something was to happen to you or your partner. As your children grow older and head towards financial independence, the amount of money they need may reduce.
Families on a budget
One of the benefits of decreasing term life insurance is a lower rate of monthly premiums. Often, premiums are lower for this particular type of insurance because it costs insurers less to cover you over time. So, it could be worthwhile considering if you’re on a tight budget.
It’s worth remembering that with this policy, your benefit amount will reduce over time, so it is important to ensure you have adequate cover for later on in life.
How do I work out how much decreasing term cover I need?
As with any life insurance policy, you should calculate how much you need before choosing a benefit amount. You can do this by deciding what you want the benefit amount to cover and for how long. So, for instance, if you want it to help protect your family from being left to repay your mortgage alone, you can choose a benefit amount and a term that coincides with your mortgage repayments. If you want to help to protect your family until your kids are older, then you need to calculate expenses over time and work it out from there.
If you don’t feel like sitting down and doing the maths, you can always use on our handy life insurance calculator to help work out what size benefit amount you need. With some careful planning, you can make sure you’re not overpaying or leaving your loved ones short when it matters most.
What other options are there?
If you would rather a term policy that doesn’t decrease over time, you could consider another type of term policy like fixed term or increasing term.
With fixed term insurance, your benefit amount and premiums remain the same for the duration of your policy. There are no unexpected surprises and you can be sure that your family will be covered as long as you maintain your policy.
Increasing term insurance could be useful for those who believe they may be able to afford a higher rate of premiums down the line or would like to help protect their benefit amount from inflation. This might be due to potential career progression or you might be free from some of your current financial commitments later in life, meaning you can afford to pay more.
Choozi can help
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