Decreasing term life insurance

Decreasing term life insurance, or simply, decreasing life insurance, is a type of policy that pays out upon your death but the amount paid out decreases over time. 

Decreasing term life insurance is usually set to mirror how much debt you have left in a repayment mortgage. As you pay off the mortgage with your monthly instalments you’ll need a decreasing amount to clear the outstanding debt if you pass away.

What is decreasing term life insurance?

Life insurance pays out if you pass away while the policy is in place. The money is then available to your next of kin. There are three main types of life insurance: 

• Whole of life - called life assurance, this will cover you with no maximum age or number of years of cover, as long as you continue to pay the premiums.

• Level term life insurance - this is for a fixed sum over a fixed number of years (the term). If you pass away within that term, the policy will pay  out the agreed sum.

• Decreasing term life insurance - this is for a fixed number of years but the size of your payout decreases over time. It is usually designed to match your decreasing mortgage or other debt, with the term matching the term of your mortgage.

If you have mortgage repayments or other debts that need to be paid off and you have calculated that it will take you 15 years to clear the debt, then you need a life insurance policy with a term of 15 years. This can help your spouse or others cope with the costs that still need to be paid after you die.

If you don't die during the life insurance term, you will have lost some of your money through the premiums of the insurance policy, so it's important to ask whether it's worth it. If your loved ones would not be able to cope financially after you die, then a life insurance policy might be something you really want to do. If they’d have other sources of income, maybe you don’t need life insurance.

The premiums for decreasing term life insurance are lower than for level term. The insurer knows that X% of its customers will claim every year. With level term, the cost of the payouts stays the same. But with decreasing term cover each year the amount the insurer pays out is reduced, so it can afford to charge a lower premium.

Should I get decreasing term life insurance?

Taking out any life insurance policy depends on a variety of factors and circumstances in your life.

Some mortgage lenders, for example, will insist that you get life insurance in order to finalise buying a property, but picking the right option for you should still be carefully considered.

If you have a home you are still paying off the mortgage for, you may want to get decreasing life insurance to guarantee that your family can continue living in it. Many people would want to avoid the prospect of their family having to sell their home because they can no longer afford the repayments. Life insurance might be the best security against that.

With decreasing term life insurance you can align the length of your debt repayment plan with the length of the policy. The value of your cover will get smaller as the years go by, but so will your mortgage repayments as you get closer to clearing your debts.

But decreasing term life insurance is not the only type of term life insurance available. Read on to compare decreasing term life insurances.

Decreasing life insurance or level term life insurance?

Decreasing term life insurance is the cheaper option in comparison to level term life insurance, but as a result you get less cover.

As with all financial products, when comparing the best insurance policies for you, your own personal circumstances should be a deciding factor, rather than just looking at the cost.

Level term life insurance is one of the more common types of cover available, and as the name suggests, works by giving you the same level of cover throughout the term of the policy. For example, you will pay the same premium and receive the same payout whether you die after five years or 10 years into a 15-year policy term.

Decreasing term life insurance might be better for you if you are looking for a cheaper option and if you are covering debts that are going to shrink over time, like a mortgage.

Some people may still prefer to get the extra cover that comes with level term life insurance because, with time, it should be able to cover more than just the outstanding debt. The payout from a level term policy might be able to cover extras like funeral costs and clearing any other debts that might need to be paid after you die, or just giving your family some money to spend.

When you start comparing life insurance policies, it's worth looking at how much cover you will need, how much you would be willing to pay, and for how long. Many people have both level and decreasing term policies to serve different purposes.

Whatever you choose, look at ways to lower the costs like improving health or quitting smoking, as these are factors that insurers will take into consideration when assessing how much you should pay.

There are many other types of life insurance policies out there, so it's certainly worth learning more and shopping around before you settle on one.

*Based on £150,000 of level-term cover for 25 years for a 30-year-old non-smoking male with no pre-existing medical conditions (March 2023).

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