Decreasing Term Insurance: What Is It?

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It’s easy to get confused with all the terminology surrounding life insurance. At Quick Quote Protect we like to provide you with the information you need to make a properly informed decision regarding your life cover – after all, it is a meaningful financial commitment with a significant impact to the lives of your loved ones when you pass away and it needs to be done well.

What is decreasing term life insurance?

First it is important to understand the terms and what they mean in relation to life insurance:

• Decreasing – this means that the value of the final pay-out lowers over time. What might begin as £300,000 cover might only be £200,000 after eight years, and £100,000 after sixteen.
• Term – this means the length of time. With a decreasing term policy, you will choose a length of time for the policy to run, so it will have a start and an end date.
• Life insurance – also called life assurance, life insurance is an agreement with the insurer that should you die (within the term), a lump sum will be paid to your beneficiaries.

Combining these three terms, decreasing term life insurance (or decreasing term life assurance – DTA) is a policy of financial cover that will pay a lump sum to your beneficiaries if you die within the period agreed (the term). The exact amount of that lump sum will lower over the course of the policy.

Why would I want a life insurance policy that decreases?

On the face of it, the idea of taking out cover that gets progressively worse as time goes on seems like a crazy thing to do, until you understand the main purpose for a DTA policy – covering a mortgage.

When you first take out a mortgage, the amount remaining that you owe the lender is high, but over time you make your regular monthly payments and the balance of your mortgage drops.

A decreasing term policy is designed to make sure the mortgage is paid in the event of your death. The amount needed, therefore, is lower as time goes on due to the payments on your mortgage you have already made. Eventually, the mortgage will be paid in full and the DTA policy will no longer be needed.

By having a policy that requires less pay-out as time goes on, you become substantially less of a risk for the life insurance provider and that means you get cheaper premiums. Decreasing term cover is considerably cheaper than a similarly framed level term life insurance policy, also known as level term assurance (LTA).

What is the main difference between decreasing term insurance and level term insurance?

The final sum assured (pay-out amount) of a level term insurance policy doesn’t change over the lifetime of the policy. If you take out cover for £300,000 then no matter when you die, and if it is within the policy term, £300,000 is the amount that your beneficiaries will receive.

As described above, a decreasing term policy has a changing sum assured that lowers over the term. Unless you die in the first month of the policy, your beneficiaries will receive less than the initial pay-out amount – but importantly, still enough to cover the mortgage it was designed to pay for.

In real terms, this difference is reflected in the cost of the policy. Level term assurance (LTA) premiums are higher than decreasing term ones.

Do I need mortgage decreasing term assurance?

Almost every DTA policy is designed to cover a mortgage and is taken out either simultaneously with the mortgage or soon afterwards to cover the remaining time. If you have a mortgage and want to make sure that your family does not lose their home should anything unexpected happen to you, then a decreasing term life insurance policy is the best way to guarantee that security.

Decreasing term assurance is affordable and provides a level of comfort in knowing that your family home is looked after and it can therefore help every family relax.

Is it legal? Do I need life insurance for a mortgage?

While not a legal necessity, some mortgage lenders insist on you having a decreasing term life insurance package in place in order to secure the mortgage itself.

Be aware that the lender is likely to try to sell you an associated life insurance package alongside your mortgage but the cost of premiums you will get on this policy are very likely to be higher than one we can offer at Quick Quote Protect.

We specialise in mortgage protection insurance and are brokers who represent a wide range of life insurance providers. Our life insurance quotes will be considerably cheaper than automatically going with your mortgage lender’s preferred provider, so do not feel forced into accepting the deal they offer you and politely indicate that you intend to get independent decreasing term insurance quotes. It won’t affect your mortgage deal and could save you thousands over the years.

What other life insurance examples are there for DTA vs. LTI?

Due to its nature, decreasing term life insurance is often used to cover other debt repayments outside of mortgages. Car payments, ongoing debt and business concerns are all good examples of real-world situations that can be made secure through the use of decreasing term cover.

However, level term life insurance is a more suitable product if you are looking to leave a lump sum for your beneficiaries, as it provides a set amount that you can rely on for your family.

How long is a term and what amount should I set for my decreasing term life insurance?

When covering a mortgage, it is best to set your DTA term for the same length of time, covering your mortgage term exactly.

Due to the nature of interest rates and potential fluctuations with your mortgage payments, it is usual to opt for a slightly higher level of DTA that is needed to clear the mortgage, giving you a little breathing space in case anything changes. For this reason, we often suggest estimating on the high side, and for a mortgage rate of 3.5%, for example, would recommend a life insurance policy that acts as if the interest rate were 5%, giving a little overhead.

The added bonus of this, slight though it is, is that there may be a little money left over once the mortgage is paid off to help your beneficiaries cover any other outstanding costs.

How do I get a decreasing term life insurance policy?

Give us a call at Quick Quote Protect today! Our expert advisors are on hand to discuss the exact situation with your mortgage and design a DTA to meet your requirements perfectly. If you are yet to get a mortgage but are in the market, then call us now to get a quote before your final conversations with the mortgage lender and be well prepared!