Decreasing Life Insurance Explained

When you have financial dependants that rely on your income, taking out life insurance with decreasing cover will ensure your family keeps a roof over their heads should you die before your mortgage is paid off.

In this explanatory guide we tell you all about mortgage life insurance including how it works and how it compares to level term life insurance to help you decide on the best policy for you and your circumstances.

In this post we cover:

What is a decreasing term life insurance policy?

How does a decreasing term policy work?

What happens at the end of a decreasing life insurance policy?

What is the difference between life insurance and decreasing life insurance?

How much does decreasing life insurance decrease by?

Level term vs decreasing term life insurance

Is decreasing life insurance worth it?

What type of life insurance policy is right for me?

What is a decreasing term life insurance policy?

A decreasing term life insurance policy, also referred to as a mortgage decreasing life insurance policy, is a niche type of life insurance borrowers often take out to cover the cost of paying off their mortgage debt, in full, in the event of their untimely death.

The potential payout from the insurance decreases over the term (number of years) of the policy as does the size of a borrower’s mortgage which is why decreasing life insurance for mortgage loans is so popular.

A decreasing term life insurance policy will also payout a lump sum if you are very sadly diagnosed with a terminal illness with a prognosis of only 12 months or less to live, as long as the illness is specified as being covered in the policy terms.

For an additional fee, you can also take out decreasing life insurance with critical illness cover. Critical illness cover means that if you’re diagnosed with a serious illness or condition that's covered and named in your policy terms, you will also receive a payout.

Note: Decreasing term life insurance is only suitable for repayment mortgages; it’s not recommended for interest-only mortgages.

You might be interested in: Critical illness cover explained.

How does a decreasing term policy work?

When you take out a decreasing term assurance policy, unlike whole of life cover but similar to term life insurance, the policy will only payout during the ‘term’ of the policy. This means that if you die after the policy term (the amount of years it covers), neither you nor your beneficiaries will receive a penny.

The amount to be paid out on the policy decreases throughout the term in accordance with your depleting financial commitments, usually the diminishing size of your mortgage.

If you take out this type of insurance to cover the cost of redeeming your mortgage, it’s vital that you ensure the policy’s decreasing payout amount coincides with the amount you’d have to pay your mortgage in full. So if the interest rate on your mortgage increases and is higher than when you first took out the policy, you should contact your insurer and adjust your payments accordingly.

Note: If you do not keep up-to-date with your monthly payments, your policy will be cancelled and if you are dishonest when you apply (i.e. fail to mention an existing serious illness), then your policy will become null and void, and any claim made on it will be rejected.

Read more: Do you need life insurance for a mortgage?

What happens at the end of a decreasing life insurance policy?

If you are still alive and kicking when your policy term expires, then you will not receive any money back and all of your payments will be kept by the insurer.

If you want life insurance that is guaranteed to payout at whatever age you die and without the limitations of a fixed term, then you should consider taking out whole of life insurance.

What is the difference between life insurance and decreasing life insurance?

• Level term life insurance will pay out a fixed lump sum and the payout amount will never change during the term of the policy, nor will the premiums you pay.
• A decreasing life insurance policy’s payout amount gets smaller and smaller as the term decreases, as do the premiums you pay.

You might like to read: Is life insurance guaranteed to pay out?

How much does decreasing life insurance decrease by?

A decreasing life insurance policy will typically decrease by approximately 7% each year.

When you take out a decreasing policy you will usually match the decreasing premiums and payout value to whatever your repayment mortgage will cost to pay off. So as the years go by, your premiums will decrease in size (cost less) in line with your shrinking mortgage.

You might be interested in: Why do people buy life insurance?

Level term vs decreasing term life insurance

To try and help you decide if decreasing term life insurance is the best life insurance choice for you, here’s a brief comparison of level term life insurance vs decreasing term life insurance:

Level term	Decreasing term
Payout amount stays the same throughout the term of the policy but premiums are more expensive as a result.	Payout amount decreases throughout the term of the policy but premiums are much cheaper as a result.
Tends to payout more money so your loved ones can pay the bills and can cover the cost of your funeral, etc.	The payout will only be enough to pay off your mortgage meaning your family will have to be financially independent and capable of paying all other household bills.
Best for those who have nominal debt and simply want to leave a cash lump sum inheritance for their loved ones or those who have an interest-only mortgage.	Best for those who just want to cover paying off a repayment mortgage and whose family can cope with paying other household bills.

You might like to read: Why don’t people want to buy life insurance?

Is decreasing life insurance worth it?

Decreasing life insurance is most definitely worth considering if you have a large, long-term mortgage as you never know what the future may hold (i.e. when you’re going to pop your clogs!).

It’s also a great option for those who cannot afford the more costly premiums you typically have to pay for term or whole of life insurance.

To help you decide if this is the right insurance for you, here’s a brief roundup of the pros and cons of decreasing life insurance.

Pros	Cons
The monthly premiums are cheaper than you’d expect to pay for other types of life insurance.	Not suitable for interest-only mortgage as the reduction in payout would not be enough to pay off this type of mortgage.
Your loved ones will keep their home and a roof over their heads  should you die before your mortgage is fully paid off.	The policy loses significant value over time and could easily be worth less than the amount required to pay off your mortgage.
If you’re diagnosed with a terminal illness that’s covered by your insurance and told you only have 12 months left to live, you can draw on your policy early.	If the policy term ends and you’re still alive (yay!) you will not receive a penny (boo!).

You might be interested in: Cancelling life insurance: things you need to know.

What type of life insurance policy is right for me?

When trying to decide which life insurance policy if right for you and your own personal set of circumstances, you should consider:

• What cover you’d like (i.e. critical illness)
• The amount you’d like a policy to pay out
• How much you can afford to spend on monthly premiums
• How many years it will be before you’ve paid off your mortgage and have no large financial commitments left to pay
• Your age - if you’re knocking on a bit, the premiums may be too high!
• The state of your health - if you have a serious, life-threatening illness you may struggle to get cover or the premiums too costly (unless you take out over 50s life insurance)
• Whether just paying off the mortgage will be enough to make sure your family’s financial needs are catered for
• Whether it’s important to you to make sure your funeral is paid for
• Whether you’d like to leave a lump sum for your loved ones at whatever age you die
• Have many of your close family members had a critical or terminal illness (i.e. your parents) that could be hereditary?

You may find it helpful to read our article ‘Different types of life insurance cover explained’ which tells you all about the four main types of life insurance, including over 50s life insurance and critical illness insurance.

Another blog that may be of interest to you is ‘Funeral insurance explained’ which is all about a type of life insurance you can take out purely to cover the cost of your funeral.

If you still can’t decide which type of life insurance is best for you, then you should seek professional life insurance advice from a life insurance broker. A broker will talk you through all the different life insurance options that are available on the market and can help find you the best deals. However, you will have to pay a fee to a broker which is typically 20% of the cost of your policy.