Decreasing Term Life Insurance

What is decreasing term life insurance?

At a a glance, this is a life policy that works to your finances as a cost-effective, if prudent, method that shrinks costs as your loan reduces in size. A decreasing term refers to how a policy holds it value: the value of your policy will become smaller as the loan it’s protecting reduces in size. It fits, near-perfectly, with a repayment mortgage.

This is a wise, if popular, option, for loans that reduce in time – the likes of those with a mortgage, for example.

How does a decreasing term work?

There are key pieces of your life policy that will need to be populated: the term and sum assured. Between these two details, you can really take ownership over your life policy.

  • What is my “term”?
    A life policy will contain a length of activity, called its term. This is a period of time, usually spanning decades, in which your cover is actively protecting you. A term, importantly, will define the start and completion of your life policy. Yet, If your life policy matures and no claim is made, then your cover will need renewing.
  • What is my “sum assured”?
    If a term, pithily summarised, defines the length of activity against a life policy, then the sum assured is the level, or total value, of your cover. This value will inform your final payment, if a valid claim is issued.

Unlike other cover types, the level of cover in a decreasing term is dynamic rather than fixed. That means that your overall sum assured reduces as your policy gathers time – and, subsequently, as your mortgage shrinks.

This also means that, if you were to pass away, the amount in your policy may have reduced from when it first started.

Why is it popular with repayment mortgages?

Mortgages have different schemes of repayment; some only reduce at the interest acrued in time, whilst others ebb away at the overall value of a loan. When a loan against a property is paid back, usually through monhtly instalments, this is known commonly as a “repayment mortgage”. If you’re unsure of the financial scheme against your home, check the correspondance with your lender.

This is a route toward total ownership over your home, yet a decreasing term can ensure that you don’t overpay to keep it protected.

Why decreasing term life cover?

In the UK, there is estimated to be 10.94 million mortgages.

Because mortgaging has become the principle entryway into getting a property (in the UK), this debt has been, historically, one of the most significant ones we accrued in our lifetime. What’s more, the annual (and average) prices against housing in the UK is on the rise, grossing upward peaks, where in April 2019 average house sales were sized up to £228,903.

Why people like decreasing term life insurance:

  • Helps to manage mortgages, especially ones that decrease in value over time.
  • Can clip any other debts or loans.
  • Frees up your family budget to exist without the financial tension of competing with a mortgage.
  • Keep up with the running costs of the family.
  • Secure your family home.

Having hold of the family home, keeping it close to the heart, is an important task we all share in common. Opting into this cover type can look after your home, by ensuring the funds are always close by if anything were to happen to you (or your active income).

Using life insurance for a mortgage 

Here’s the most popular nomination for managing your repayment mortgage.

As discussed, a decreasing term mortgage is ideally suited to tackle a mortgage, or sizable loan, that drops in value as it ages. Yet, beneficially, this insurance works to drop costs as it ages, freeing yourself feeling financially pinched. On a mortgage, ensuring that money isn’t a matter, now or in the future, people use life insurance to stay safe and protected.

If, for example, you have a mortgage loan to the sum of £250,000, then your insurance policy would hold £250,000.

Deciding what’s right for me

A safe, if smart, starting point is ask yourself why am I getting a life policy (and for who is it for?).

Empowering your search by asking the essentials will guide you through the various cover types to match up with something that fits your budget and goals.

  • What are you looking to cover?
    Ultimately, this is asking if a decreasing term can fit within your desired goal. If, for example, you’d like a sizable payment, that retains its value, then a level term life policy might feel more suited to your search. This could be more helpful if you wish to leave behind more than a sum to complete the mortgage debt. Yet, if you’re looking to manage your mortgage then committing to a decreasing term could wisely accomplish this task.
  • Does it suit my budget?
    Often affordability is a major influence when people are searching for a life policy. A decreasing term is often embraced, beneficially, for being the most financially-effective cover type. That means it works well with most budgets.

How much cover do I need?

As the costs against premiums typically decrease, the loan value becomes less, this can be one of the most – if not the most – affordable options.

Against a level term or whole of life counterpart, a decreasing term generally tells insurers that you’ll need less as a final payment, mostly because you’ll have paid off your mortgage, at least reducing the size of the loan as the policy ages. It’s not just that your financial payload drops, but your risk reduces with the policy, as the term shrinks. This means, generally, that both your risk and the financial demand of your policy downsizes with time.

What is the average cost of decreasing term life insurance?

The cost of a policy is often guided by certain factors:

  • Your age.
  • Do you smoke?
  • Overall health.
  • Overall wellbeing.
  • Your term length.
  • The value expressed in your policy, or level of cover.

How much decreasing term life insurance is enough?

the amount you’ll need on your decreasing term life policy is decided by the current balance of your mortgage.

By design, a decreasing term is ideally suited to managing the loan against a repayment mortgage, with reducing costs. As such, the amount you’ll need will be calculated against the outstanding balance, or amount, of your existing loan.

So, for example, a loan to the value of £150,000 will need a sum assured to the same amount (or £150,000).

Simply refer to your mortgage, or lender, to determine the basic amount you’ll need. The value of your life policy will closely match that of your mortgage. Yet, for those wanting more mileage out of a life policy, you can nominate a value greater than your mortgage. This extra money can be freed up and used by your loved ones to cover, for example, inheritance or funeral costs. Though it’s often embraced as a savvy tactic to handle mortgaging, there are more options for a decreasing term life policy.

Which is the best life insurance?

It’s not uncommon to want “the best” life policy. But what does that actually mean? Searching for a policy best for you means finding something answerable to your budget and goals.

How is decreasing life insurance and level term different?

The major difference is reflected in the sum assured, or value held in a policy.

A decreasing term, as previously mentioned, is unique because the value held in the policy reduces over time. Yet, with a level term the sum assured is fixed, or locked-in, as the same amount from the beginning of the policy to its end.

A level term could handle larger sums, especially if you’d like to leave behind a more sizable, lumped payment. But, it’s worth noting, a level cover life policy, which holds value, is likely to be more expensive than insurance on a decreasing term.

A level term has its ideals: it can be used, for example, against a mortgage with interest-only payments. Or, you might consider it for inheritance. Perhaps to leave behind money to cover the running costs of your family’s everyday needs.

How is decreasing life insurance and whole of life different?

A whole of life policy is categorised as life assurance (unlike insurance).

Assurance, in sum, guarantees a final payment on the death of the policyholder. And so, a whole of life policy is usually beneficial for its guarantee of concluding on a payment.

Unlike a level term, which has a difference in the insurable sum, the major change here is in the term length. Life insurance policies will be contained within a term, otherwise a set of dates that expresses the activity of your coverage (outside of this term your policy is void.) A life insurance policy will issue payment on the death of its policyholder within its specified term.

Because the length of your term holds, or doesn’t expire, the premiums are generally costlier.

What is life assurance?

In short, it’s a form of lifelong cover. That means the term, set up against most cover types, doesn’t expire (unless you cancel the policy or miss premiums.)

As opposed to insurance, life assurance is a way of ensuring – or guaranteeing – a final payment is issued on the maturity of a life policy.

A deceasing term, however, will follow the lifespan of your debts and, eventually, will expire.

Recap of policies:

  • A level term has a fixed sum assured, so its value holds over time.
  • A whole of life policy has a lasting term, so a final payment is guaranteed.
  • A decreasing term works with your debts to reduce in scale, and value, over time.

How does a decreasing term life policy pay-out?

A valid claim must be issued within the definable term of your life policy, in order for your family to enjoy the benefit of this cover type.

Being savvy with your cover, it’s worth knowing that on life insurance policies – such as a decreasing or level term – it is possible to outlive your covered term. Beyond the boundary of your term, you’ll be uncovered, or financially vulnerable.

You can, then, opt into a new policy.

Joint decreasing term life insurance

There is the chance at winning some savings if a couple manages their policy jointly.

What does this mean – to go joint?  

Ideally for couples, partners, or those sharing the benefits of a life policy, going joint can be a savvy way of managing your money. It’s a shorthand for condensing two policyholders into one combined policy.

True, a joint policy only ever issues one payment, often against the first named policyholder to pass away. But it can be an easier way of accessing a more affordable policy for your family.

If you’re here to cover a mortgage, a joint policy can handle that challenge.

If you need a larger sum assured, however, holding multiple, if separate, polices can extend your money.

Can I hold multiple policies?

Yes, you can.

If you’re looking to get more covered, to add to the amount in your policy, but are finding it otherwsie problematic to hold down the desired sum in a single life policy, consider having two instead.

With separate policies you can access multiple payments and elaborate on the sum assured, which is ideal for those looking to cover more than just a mortgage.

Decreasing term life insurance for mortgages

Most of the UK uses a mortgage to make home a reality.

A decreasing term life policy is superb at addressing something that can quickly feel problematic: how do I protect my home? It’s a statement that gains truth the more you grow out your family.

Do I need life insurance to have a mortgage?

Whilst it’s not an essential, as a legal requirement for a mortgage, it’s often considered a must-have for any home.

Let’s consider the why in two salient points:

  1. Lenders may feel that your candidacy for home ownership is more attractive if you intend on acquiring a life policy. Sometimes it’s even a request prior to funds being released.
  2. There is an emerging philosophy that a mortgage ought to be secured against a policy as the most basic form of protection for your family. A sizable loan begets protection of equal size.

Re-mortgaging

When changing your mortgage, the amount of your policy could change.

This could effect the affordability of your life policy, especially the suitability of a life policy that decreases its value over time.

Remortgaging is motivated by a number of reasons:

  • Upscaling to a new, often bigger and more expensive, home.
  • Relocating.
  • Renovating an existing property, such as expansions.
  • Seeking out a better mortgage deal.

If the debt increases at all, against the property, then it’s worth revisiting your life policy to ensure it holds sufficient funds. It’s also a case that, if your interest changes, the rate of your mortgage debt reducing is quicker than your life policy. It’s always worth staying financially secure by ensuring that the funds in your life policy can match up against your mortgage.

What is a “special events option”?

There’s a “special events option” that can be evoked in many life policies: this can help to expand on the value of your policy without needing to renew it. If a policy expires, you can source the market for new, possibly more affordable quotes. This could win back savings, if your current rate feels tight for your debt.

What else can I use decreasing term to cover?

Its benefit is not limited to a mortgage.

Consider, for example, how this affordable cover type could be paired with another life policy.

There’s an advantage to a decreasing term that easefully manages your debts over time. Because its prices drop eventually, a policy can lift the financial tension, whereas other policies keep up those expectations.

Understanding the “layers” of your life policy

Layers, as we coin it, are the degrees of coverage written into your life policy. This means, simply put, that with every new layer, you win that extra bit of cover – against illness or injury. This stacks up the financial benefit in your policy, potentially securing you against much more than death.

Critical illness with decreasing term insurance

You can layer in a critical illness option into your life protection for added security.

Though not essential to your policy, as a smart extension this option gives you more mileage should anything happen – added protection keeps you safe from financial upset resulting from an illness or injury.

This is for critical, though not terminal, illnesses.

The dread list of illnesses spans from heart attacks to strokes, to certain cancers; and a critical illness option could give you peace of mind if anything were to put you out of work.

Put the focus back on recovery, as your finances become secured with a critical illness option – that can eliminate the scare of injury, too.

Terminal illness with decreasing term insurance

As a routine piece of life insurance, most life policies will include a terminal illness clause.

This could, if enacted, offer up an early payment before the term expires – and in the event that you’re diagnosed with a terminal illness.

Money can be routed into private medical bills, home-based adjustments, or simply affording peace of mind that the mortgage is settled. And so, your family won’t inherit the financial fret of settling up debts.

Where can I buy a life policy?

We understand that the hunt for an ideal life policy can feel intimidating at times. Yet, by empowering your search through the likes of a comparison site you could be reaching out to grab at top deals more easily, conveniently and without too much hassle.

Did you know that life policy costs can differ greatly between insurers?

Writing your life policy in trust

What does “in trust” mean?

Uncomplicated, this means that your life policy contents – its funds – are removed from your estate. Normally, your life policy adds up with your estate – bundling your property, possessions & savings.

Anything above the threshold of £325,000 is subjected to a 40% inheritance tax.

Writing your decreasing term life policy in trust means potentially avoiding the inheritance tax – and, consequently, keeping your money saved so that it reaches, rightfully, your beneficiary.

Inheritance tax could otherwise minimise your final payment.

This option could help you manage the delegation, and overall sum, against your life policy, and to avoid unwanted losses.

Key takeaways:

  1. Avoid the 40% inheritance tax
  2. Skip probate, for faster payment
  3. Control the delegation of your money better.

Compare the market for top decreasing term life policy deals

Decreasing term, like most life policies, is most easily won through a comparison sites – where deals are expediently accessed to connect up with ideal rates. This can cut out the wait time and save money.

Life Market is an expert at navigating the competition to deliver big on savings for less of your time.

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