What is decreasing term life insurance?
Decreasing term life insurance is a type of life insurance policy that pays out less over time. It’s often used to cover the balance of a repayment mortgage, because the total balance of the mortgage decreases over time and will be paid off in full at the end of the term.
Often, a mortgage lender will insist that you have life insurance with your mortgage.
How does decreasing term life insurance work?
Decreasing term life insurance is aimed at people whose financial commitments reduce over time. The most obvious example is if you’re repaying a mortgage.
You’ll take out a decreasing life policy for a fixed period of time, called the ‘term’. You pay for the cost of the insurance either annually or in monthly instalments. This is what’s known as your premium.
The amount the policy pays out falls as the insurance term progresses, on a monthly or yearly basis. It will be down to zero by the end of the term. That means if you were to die near the beginning of the term, the people you love would receive more money than if you died nearer to the end of the term.
What are the pros and cons of decreasing term life insurance?
There are several advantages to taking out decreasing term life insurance, but whether it’s right for you will depend on your personal circumstances.
- Cheaper to buy: Monthly premiums are often lower than with other types of life cover. That’s because the amount of money an insurance provider needs to cover you for, reduces over the course of a policy.
- Protect your mortgage: Decreasing term life insurance is popular with people who have a repayment mortgage. The amount paid out should decrease broadly in line with your mortgage. This should be enough for the people you most care about to remain in the family home if you die.
- Protect your family: If you have children, the amount of money you’d need them to receive, if you or your partner died unexpectedly, might reduce as they grow up and become more self-sufficient.
- No good for interest-only mortgages: Decreasing term cover won’t work for you if you have an interest-only mortgage. That’s because the payout from the policy reduces each year, so it wouldn’t be enough to pay off the interest-only mortgage balance, which stays the same throughout the whole mortgage term.
Drop in value: Typically, as time passes, any claim on a decreasing life insurance policy will be worth less. So, check the interest rate of any quote to make sure that the cover wouldn’t fall significantly faster than what you owe on your mortgage.
No maturity value: If you live beyond the end of the plan, there’ll be no pay-out when it ends.
Frequently asked questions
What’s the difference between level term and decreasing term life insurance?
Level term insurance pays out a set amount that can help your family keep on top of household bills and pay for your funeral, if you die within the term of the policy. Your family would be paid the full pre-agreed cash sum.
Decreasing term insurance, on the other hand, is mainly for people with a repayment mortgage whose dependants can cover other expenses. The lump sum paid out reduces throughout the length of the policy, roughly in line with your mortgage or as your kids become more financially independent.
Do I have to take out decreasing term life insurance if I have a mortgage?
Strictly speaking, you don’t need any kind of life insurance when you take out a mortgage.
But some type of life insurance could be a sensible option if you have people who depend on you to pay the mortgage. Imagine if something happened to you and your family could no longer afford to stay in the home they cherish.
Can I add critical illness cover to my decreasing term life insurance?
Yes, for an extra cost, you can add critical illness cover to your decreasing term policy. It could pay out a cash sum if you’re diagnosed with an illness or serious condition specified in your policy documents. This can include a heart attack, stroke and several types of cancer.
What other types of cover should I think about?
If you’re working then it’s worth checking whether or not you have a death in service benefit in your employee’s contract. If you do, this benefit will pay out to your dependants if you die, so try to find out how much you’re covered for. Often, a death in service benefit is around four times your salary. This may not be enough to support your family. If that’s the case, you should probably still think about life insurance. Learn more about death in service.
You should also think about whether level term life insurance suits you better. A level term policy stays fixed throughout the course of a plan, so there’s a guaranteed lump sum payment if you die during the term. Your dependants can use it to pay off a mortgage and/or for any other expenses, like funeral costs. But you’ll often pay more for this type of cover.
Another option to explore if you have a young family could be joint life insurance which insures two people.
What our expert says...
“If you’re repaying a mortgage, it can make sense to opt for decreasing term life insurance to cover your financial commitment. The amount the policy will pay out reduces over time, in line with the amount that you owe on the mortgage.”
- Kara Gammell, Finances expert
How much does life insurance cost?
A life insurance policy doesn’t have to be expensive. On average we found that people we helped could find a quote from £14.93 a month**.
**51% of customers could achieve a premium of £14.93 per month for their life insurance for a 10 year term, up to £100k worth of cover and no critical illness cover. Based on Compare the Market data from December, 2021.
How do I compare life insurance?
Find our lowest prices on life insurance and see if you could save. Just tell us a few details about yourself and your health, plus how much cover you want and the length of cover you need.
The list of quotes we provide will also show you optional extras you might want to add, like critical illness cover. We’ll help you find a deal that works for you.
If you’re not sure how much you need or what type of policy to get, our life insurance partners at LifeSearch will be happy to help. Just give them a call. Lines are open:
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**51% of customers could achieve a premium of £14.99 per month for their life insurance for a 10 year term, up to £100k worth of cover and no critical illness cover. Based on Compare the Market data from March, 2022.
***Correct as of March, 2022.
^For the period 1st June to 31st August 2021, 8944 people responded to the recommend question. 8,226 responded with a score of 6 or above, therefore 92.0% are likely to recommend.