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Decreasing-term life insurance

What is decreasing term life insurance?

published: 22 December 2020
Read time: 5 minutes

Decreasing-term is a cheaper form of life insurance where the pay-out reduces as the end of the term approaches

Decreasing-term life insurance is a cheaper form of policy that pays out less as time goes on. If you pass away near the beginning of the insurance term, your loved ones will receive more money than if you pass away near the end. Because the sum insured decreases over time, monthly premiums tend to be much lower for decreasing-term life insurance policies.

What is decreasing-term life insurance for?

Decreasing-term life insurance is usually taken out to ensure a specific debt is covered – usually a mortgage. If you’re steadily paying off your mortgage, in the event of your death your dependants would need less money to cover what remains of it as time goes on.

Decreasing-term life insurance ensures that if you die, your loved ones won’t have to face the stress of paying off your outstanding debts – or even having to move home – at an already difficult time.

Many mortgage lenders actually insist that you have a life insurance policy in place before they’ll agree to lend you money for this very reason.

Decreasing-term life insurance is no use if you have an interest-only mortgage – for instance, on a buy-to-let property. Interest-only mortgages require you to pay back the full sum at the end of the term, and they’re unlikely to be covered by a decreasing term life insurance policy.

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How does decreasing-term life insurance work?

You buy decreasing-term life insurance for a specific period of time – the ‘term’. You then pay premiums on a monthly or annual basis, and the amount the policy pays out falls as the term goes on, also either month by month or year by year. By the end of the term, the amount paid out falls to zero.

If you’re using your decreasing-term policy to cover a mortgage, the term will probably last as long as the mortgage does – so your loved ones will always have enough to keep the house.

Because the decreasing structure makes your policy less expensive to insurers, buying decreasing-term life insurance is often much cheaper than ordinary level-term insurance, where the payout doesn’t fall as the term goes on.

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

Level-term and decreasing-term are the two main types of life insurance. With the former, you pick how long you want insurance to last for and how much you want it to pay out. If you pass away at any time during that term, your loved ones will receive the full amount.

Decreasing-term life insurance is different: it usually has the same value as a loan – for instance, a mortgage – and its value falls as you pay off your debt.

However, you can still set the term of your policy however you want, and there are other reasons you might want to buy decreasing-term insurance. For instance, parents might want an insurance policy which grants their children a larger sum if you pass away while they’re young – but which pays less when they’re older and more financially independent.

Can I get critical illness cover with decreasing-term life insurance?

As with all types of life insurance, it’s possible to add critical illness cover to a decreasing-term policy – but your premiums will rise to reflect this extra level of insurance.

Critical illness covers you against the risk of falling seriously ill and being unable to meet your financial commitments. It pays out a tax-free lump sum if you’re diagnosed with an illness specified on your policy.

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

Whether or not a decreasing-term life insurance policy is right for you will depend on your situation and your priorities, so weigh up the advantages and disadvantages before you buy.

Some good reasons to get a decreasing term policy include:

  • The price: Decreasing-term life insurance is often much cheaper than level-term. It could be right for you if you’re on a tight budget but still want to protect your loved ones from financial problems if you pass away

  • To protect your mortgage: If you don’t have any dependents, a decreasing-term policy can still protect your mortgage – and some lenders will insist you have some kind of life insurance before they offer you one

However, decreasing_term life insurance also has some drawbacks. These include:

  • Decreasing value: The amount your policy pays out will decrease with time. This means that if you’re towards the end of your term, you’ll still be paying the same premiums – but for much less reward

  • No maturity value: Because the value of your policy steadily falls to zero, if you survive past the end of the term there’s no chance of a payout when it matures

How can I find cheap decreasing-term life insurance?

The best way to get a good deal on life insurance is to use a price comparison site like MoneySuperMarket. Our price comparison engine searches through a range of leading insurance providers so you have all the best deals at your fingertips. That way, you’ll be able to weigh up the pros and cons of each provider’s policy and find a deal that works for you.

Comparing life insurance policies is quick and easy. Just tell us what size a sum you want insured and how long you want the policy to last. You’ll also be asked a few questions about your personal circumstances and health. It’s important that you’re honest – if you don’t tell the truth, it could invalidate your policy. Once you’ve given us your info, we’ll do the rest – and you can see how much you could save.

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