How To Add Decreasing Life Insurance To Your Mortgage

Decreasing term life insurance is a type of policy that pays out less over time and is often used to cover a repayment mortgage. This is because the total balance of a repayment mortgage decreases over time and will be paid off in full at the end of the term. The amount paid out falls as the insurance term progresses, on a monthly or yearly basis, and will be down to zero by the end of the term. This type of insurance is usually cheaper than level-term insurance, where the payout remains constant.

How does decreasing term life insurance work?

Decreasing term life insurance is a type of life insurance policy that pays out less over time. It is one of the most common types of life insurance policies and is often used to cover the balance of a repayment mortgage. This is because the total balance of a repayment mortgage decreases over time and will be paid off in full at the end of the term.

You take out a decreasing life policy for a fixed period of time, called the 'term'. The cost of the insurance, or the premium, is usually paid either annually or in monthly instalments. The amount the policy pays out falls as the term progresses, on a monthly or yearly basis, and will be down to zero by the end of the term. This means that if you were to die near the beginning of the term, your loved ones would receive more money than if you died nearer to the end of the term.

Decreasing term life insurance is a cheaper form of policy than level-premium term insurance. This is because the sum insured decreases over time, so monthly premiums tend to be much lower. The decreasing structure also makes the policy less expensive for insurers.

The decreasing term insurance features a death benefit that gets smaller each year, according to a predetermined schedule that also sees premiums decrease over time. The theory behind this type of insurance is that, with age, certain liabilities and the corresponding need for high levels of insurance decrease.

What is it used for?

Decreasing term life insurance is a type of policy that pays out less as time goes on. It is often used to cover a specific debt, usually a repayment mortgage. The amount of cover reduces over time, in line with the outstanding mortgage liability. This means that your loved ones will have enough to cover the amount left on the mortgage should you pass away during the term of the policy.

Decreasing term life insurance is a cheaper form of life insurance as the sum insured decreases over time. Monthly premiums tend to be much lower for decreasing-term life insurance policies.

The policy is better suited to a repayment mortgage than an interest-only mortgage. This is because a repayment mortgage is the type of loan that reduces over time.

Decreasing term life insurance can also be used to cover other types of loans, such as car or personal loans, or to replace an income stream such as a pension or annuity. It can be used to cover any asset that your family depends on, which might become a financial burden if your income is lost.

The main point of decreasing term life insurance is to provide cost-effective financial protection that aligns with a financial obligation that decreases over time.

What are the pros and cons?

Decreasing term life insurance is a type of policy that pays out less over time, with the payout amount decreasing until it reaches zero at the end of the policy term. This type of insurance is typically used to cover a specific debt, such as a repayment mortgage, where the amount of cover reduces in line with the outstanding mortgage liability. While decreasing term life insurance offers several benefits, there are also some drawbacks to consider.

Pros

• Cost-effective: Decreasing term life insurance is often cheaper than level term insurance because the benefit can be set to fall in line with the outstanding mortgage balance or other decreasing financial obligations. This makes it a good option for those on a tight budget who still want to protect their loved ones from financial problems if they pass away.
• Protection for your mortgage: This type of insurance can provide peace of mind that your loved ones will be able to pay off your outstanding mortgage and keep their home if you pass away during the policy term. It is often used by mortgage lenders as a requirement for lending money.
• Protection for your family: If you have children, the amount of money your family would need if your partner died unexpectedly might reduce as your children grow up and become more financially independent.
• Joint policies: Decreasing term life insurance can be taken out as a joint policy, covering you and someone you have a mortgage with. This means that if either of you passes away, the mortgage is paid in full.

Cons

• Decreasing value: The payout amount of a decreasing term life insurance policy will decrease over time, which means that if you pass away towards the end of the term, your loved ones will receive a smaller payout.
• No maturity value: Since the value of a decreasing term life insurance policy steadily decreases to zero, there is no payout if you survive past the end of the term.
• Not suitable for interest-only mortgages: Decreasing term life insurance is not suitable for interest-only mortgages, as the payout amount may not be sufficient to cover the full cost of the mortgage over time.

Can I add critical illness cover to my policy?

Yes, it is possible to take out Critical Illness Cover on a decreasing term basis. This type of insurance is often added to mortgage life insurance, so the loan is protected against death and serious illness or injury. Critical illness cover provides a lump sum of money if you are diagnosed with certain illnesses or disabilities. This can be used to pay for treatment, mortgage, rent, or changes to your home, such as wheelchair access.

Critical illness plans usually cover around 40 specific medical conditions, including cancer, heart attack, stroke, and multiple sclerosis, as well as serious physical injuries such as loss of limbs. However, the number of conditions covered varies across insurers, with some covering fewer than 10 and others covering over 100. It is important to carefully read the terms and conditions of your policy to know what is covered and what is not.

When deciding whether to add critical illness cover to your policy, consider whether you would be able to keep up with your mortgage repayments if you suffered a critical illness. If your employer provides income protection as an employee benefit, you may not need additional cover. However, if you do not have any other form of sickness insurance, it may be worth considering critical illness cover, especially if you have a family to support.

Another option to consider is a long-term income insurance plan, which could pay out monthly benefits to cover mortgage repayments for the entire term of your mortgage. This type of policy usually has lower monthly premiums than critical illness cover, as the insurer pays out a monthly benefit rather than a lump sum.

What should I do if my circumstances change?

Life is full of surprises, and it's important to make sure your insurance policies are up to date and reflect your current situation. Here are some things to keep in mind if your circumstances change:

Review your policy

First, carefully review your existing policy and identify the areas that may be affected by your change in circumstances. For example, if you've recently had children, you may want to increase your coverage to provide more financial security for them. On the other hand, if your children have become financially independent, you may want to decrease your coverage.

Contact your insurer

Get in touch with your insurance provider as soon as possible to discuss your options. They will be able to advise you on the best course of action and guide you through the process of making any necessary changes to your policy. Most insurers will allow you to alter your policy, so be sure to explore all your options.

Adjust your coverage

If your circumstances have changed significantly, you may need to adjust your coverage. For example, if you've moved to a new home, you'll need to update your address details and ensure that your new home is adequately insured. Similarly, if you've paid off your mortgage early, you may want to cancel your decreasing term policy to avoid paying further premiums.

Consider additional cover

Life changes can also create new insurance needs. For instance, if you've started a family, you might want to add critical illness cover to your policy. This can provide financial support if you're diagnosed with a serious illness and help ensure your family can maintain their standard of living.

Seek professional advice

If you're unsure about how your changing circumstances will impact your insurance needs, consider seeking advice from an independent financial adviser. They can help you assess your situation and make informed decisions about your insurance coverage.

Remember, it's important to keep your insurance policies up to date to ensure you have the right level of protection for your current situation. Don't wait until it's too late to make the necessary adjustments.

Frequently asked questions