Decreasing Term Insurance Explained

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By Crispin O'Toole-Bateman

on Friday 30 August 2019

Young family sat in new home

Understanding life insurance can be difficult, especially with the number of unavoidable specialist terms in the industry.

At Unite Life we believe our customers should be fully informed to help make the right choice with their life insurance products and our no-obligation consultations follow that belief. Our library of articles is here to help you get a full understanding of everything on offer.

This article looks at the usefulness of decreasing term insurance and follows the informative article ‘Level Term Insurance Explained – for a complete understanding, please read that article first.

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

Decreasing means to lower over time and that’s exactly the difference between life insurance with a decreasing term and that with a set level term: one has a payout that becomes smaller as the years pass, the other has a payout that remains the same.

But why on Earth would you want life insurance that gets worse the longer you have it? Here’s why!

Making life insurance as affordable as possible – how decreasing term life insurance manages rock-bottom prices!

In our article on level term life insurance, we explain how risk is the major factor when determining the cost of your life insurance.

All term insurance does a great job at lowering that risk by specifying an end date after which the insurance ends, but could there be a way to make that risk smaller still?

A decreasing term policy does exactly that. It is at its most expensive for the insurance company if you die and the cover is called upon to pay out in the first few years, but the longer time passes, the smaller the payout (thus less risk), directly mitigating the sad truth that as you get older you present a naturally higher level of risk.

So, it’s very cheap – that’s great, but what is it for?

Lining your life insurance policy up to your largest financial responsibility – the mortgage

When you first buy a house, your mortgage is large. In today’s market it often represents 95% of the value of your house on day one. Over time, however, you make regular payments to chip away at the capital of the loan and as the years go by, the balance of your mortgage becomes smaller.

Just like your decreasing term assurance!

It’s no surprise that decreasing term insurance is often used to provide financial cover to pay off a repayment mortgage – because that’s exactly what it is designed to do.

By running in parallel with your mortgage balance, your decreasing term insurance hovers in the background, ready to make sure your family’s home is paid off in-full should the very worst happen.

Cheap mortgage protection insurance that provides a comprehensive level of security for your family? Decreasing term insurance could very well be considered the best life insurance in the UK!

DTA vs. LTA – the pros and cons of decreasing term assurance

It is clear that a level term policy set to the same initial amount as the decreasing term one is also going to be there to pay off your mortgage, so what is it about DTA that makes it so attractive?

It really is all about the premiums. Decreasing term cover could protect your house for as little as a fiver a month – it’s such a small amount that you could simply consider a little tag on to your existing monthly mortgage repayment and you are unlikely to even notice it!

Level term is very affordable, there’s no doubt, but decreasing term is considerably cheaper!

For many shrewd homeowners, the decreasing term policy put in place to cover the mortgage is an additional product put in place as a supplement to a more significant level term insurance package – in this way, a comprehensive level of overall life cover can be designed to properly serve your family’s needs.

That’s the advantages – the disadvantage of decreasing term insurance is also clear: if it’s not being used to cover a loan (you can also use DTA for car finance, business loans and more), it’s not really viable.

No one really wants life insurance for general use that simply gets worse as time goes on. Outside of its field, decreasing term insurance falls flat – it’s definitely a specialised product for a certain task that does that flawlessly and cares little for anything else.

Do I need life insurance for my mortgage?

There are two main reasons for getting mortgage decreasing term assurance:

  • The mortgage companies tend to insist on life cover before finalising a mortgage
  • You are securing your family home for a relatively tiny monthly outgoing

Decreasing term insurance quotes are affordable for everyone and really the question should be ‘what reasons are there not to get decreasing term insurance to cover my repayment mortgage?’ to which the answer would be: none.

Interest only mortgages – where DTA needs to be LTA!

If you have an interest-only mortgage then you are not making payments towards lowering the capital of your mortgage, and that balance doesn’t decrease over time.

A decreasing term policy is going to fail to cover it and is totally unsuitable. Here, you want a level term life insurance policy instead.

What about changing interest rates? Getting the right decreasing term life insurance quotes

It is important that you get your DTA right!

With fixed rate mortgages giving way to variable rate ones, and regular remortgaging an option taken by many homeowners, how can you be sure that your life insurance is properly in line with the real-life balance of your mortgage?

The answer is that you estimate well! Or rather, we do.

At Unite Life, our experts are well used to making sure the DTA is properly set to cover your mortgage throughout the entire term, setting the drop on the sum assured to a level slightly above that which you need. In real terms, this means that there’s often a little left over once the mortgage is paid off, though this isn’t a bad thing!

It is important that you review your life insurance payout amount against the balance of your mortgage and if there is a discrepancy between them that might worry you (typically due to a remortgage or large change in interest rates) then you may want to reassess your life insurance.

We’re used to that too – just give us a call and we can perform a full health check on your life insurance and look to make changes or even replace it with a new deal, depending on the circumstances.

Top quality life insurance advice with Unite Life

We’re not your average broker! At Unite Life all our advisors are fully trained in personal finance and regulated by the FCA.

We can talk to you in-depth regarding any aspect of your mortgage or other outgoings and put together a comprehensive life insurance package to properly suit your needs and provide complete peace of mind for you and your family.

Fill out our contact form to have one of our team give you a call, or simply pick up the phone and talk to us today!

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