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Decreasing Term Life Insurance

Last updated: 24. 03. 2020

Decreasing term life insurance is a specific type of insurance which decreases over time. Most people apply for decreasing term life insurance to cover a debt that will be left over after they die. This means that your family won’t have to cover it themselves and they aren’t left in a difficult financial situation after you’re gone. The key thing is that the payout your provider will give to you decreases over time as your debt decreases.
 
Most people buy decreasing term life insurance to pay for their mortgage after they die so that their family doesn’t have to settle it themselves and they can remain living at the family home. Many mortgage lenders will require you to buy life insurance like this before you are eligible for a mortgage loan. 
 
There is a multitude of other reasons for choosing this kind of policy over a standard one. You may feel that a decreasing payout suits you if you think the amount of cover you need will decrease as you get older - you may need less cover if you pass away in 10 years rather than 5 years for example. 

What are the differences between level term and decreasing term life insurance?

A level term life insurance policy will pay a fixed amount if you die within the time period of your policy cover. Unlike a decreasing term policy, the payout stays the same all the way through the contract. The premium you pay each month will also stay the same. It is ideal if you have an interest-only mortgage or any other debts you want to pay off without leaving them to your family.
 
The cover in a decreasing term life insurance policy decreases over time. It usually decreases at around the same rate as the debt you intend to pay back, such as your mortgage. The premiums will also stay the same throughout the term of your policy. 

How much will I pay for my decreasing term life insurance cover?

The monthly cost of decreasing term life insurance is usually a lot less than a standard life insurance policy. However, the monthly premiums are still likely to increase with age so it is important to consider whether taking your policy out early could save you money in the long run.
 
Your health will also be a factor that affects how much you pay monthly. Bear in mind that you can usually add critical illness cover to your insurance policy. This kind of cover provides a payout if you get diagnosed with a disease that would leave you struggling financially, for example if you were no longer able to work.
 
Lifestyle choices will also impact the cost of your monthly payments. For example, smoking can significantly increase the amount you are expected to pay each month due to the effect it has on your health. 

How long should my decreasing term life insurance policy be?

If you are looking to cover the cost of a specific debt or mortgage, then you need to try and match the length of the insurance to the length of your loan. By the end of your insurance policy, the payout will fall to zero, so you want to have paid off the debt by this point.
 
If you want the decreasing term life insurance to cover your mortgage when you die, you need to ensure that the level of payout won’t decrease at a rate faster than the value of your mortgage debt. Otherwise, you will leave mortgage payments leftover that your family may have to cover themselves.  
 
Bear in mind that the interest rates on both your life insurance and mortgage may differ and this could affect the rate at which both decrease as well. 

Will decreasing term life insurance work for me?

You get to decide how long your policy is going to last and the value of your payout. The amount you need will usually be associated with the amount of debt you need to cover, so you won’t always have total flexibility in choosing the size of your payout. These factors will then determine how much you pay each month. 
 
The most important thing to do is to evaluate your financial situation. How much can you afford to pay towards your life insurance each month? If you have a small budget, then a decreasing term life insurance policy could be perfect because the monthly premiums tend to be much cheaper than a standard policy. This is because the amount of money your insurance company will need to pay out to you decreases over time. 
 
If you have a mortgage it is an ideal option. This type of insurance is also a good option for young families. It’ll be cheaper than other options which is essential for most growing families, plus the payout will reduce as your children grow up and become less financially dependent on you.
 
The only disadvantage is that there won’t be any money left over to give to any dependents you leave behind as the payout is only designed to cover your debt. If they will struggle without your income, then decreasing term insurance might not be ideal.
 
But level term life insurance cover will have a payout that stays at the same value throughout your policy even as your debt decreases. Therefore, there will be money left over to give to your family as some of the debt will have been paid off by this point. If you are worried about whether your family will have financial security when you are gone, then a level term insurance policy may be a better option.

Are there any situations where I cannot get decreasing term life insurance?

If you have an interest-only mortgage, then a decreasing term policy won’t be appropriate. These kinds of mortgage contracts require you to pay off the mortgage at the end of the mortgage contract.
Fergus Cole

Author: Fergus Cole

Fergus is a journalist specialising in the personal finance, energy and broadband sectors. He also has a passion for travel and adventure so tries to make the most of this in any spare time he gets.