When looking into life insurance, one of the first questions you’re likely to be asked is ‘Would you like a level term policy or a decreasing term policy?’
We’ve put together this guide to talk you through what a decreasing term policy is, why you may want to consider setting one up and what the benefits are of having a plan in place.
A life insurance policy is a product that pays out a cash sum if you pass away. The funds usually go to your loved ones to help them continue to maintain their standard of living, or pay off any large debts, like a mortgage.
Life insurance is usually split into two categories, term life insurance and whole life insurance:
Please note: the insurance products offered by Cavendish Online have no cash-in value at any time. If you stop paying your premiums your cover will stop, your policy will end, and you will receive no benefit. If you have not claimed before the end of your chosen policy term, the policy will end, and no benefit will be paid.
Term life insurance policies can be set up in two different ways. They can either be decreasing term life insurance or level term life insurance.
Decreasing term life insurance is most commonly known as mortgage cover, so if you’ve been through the process of buying a home, it’s likely that you have come across it.
Decreasing life insurance is one of the cheapest types of life insurance, since your sum assured (the amount you’re covered for) decreases over time. The rate at which it declines is designed to mimic a mortgage of the same amount, to ensure that there is enough money to pay off the mortgage if you die.
Whilst a decreasing term life insurance plan is designed to pay off a mortgage, should you pass away, sometimes it’s not required and your beneficiaries may decide to use the money for something else at the time.
Decreasing term life insurance is usually cheaper than level term life insurance.
Level term life insurance, on the other hand, provides you with a lump sum assured that remains the same for the lifetime of the policy. For example, if you had £200,000 worth of cover in place over 20 years, your payout would be £200,000 if you died on day 1 or day 7000 of the policy.
Learn more about level term life insurance.
Decreasing term insurance is often referred to as mortgage insurance. This is because it is designed to be set up with a sum assured matching your mortgage, and a term matching the length of your mortgage.
For example, if your mortgage is £200,000 over 25 years, and you bought a decreasing term life insurance plan for £200,000 over 25 years, both the plan and the mortgage would decrease over time, eventually getting to £0.
Of course, we don’t know what’s going to happen in life, and some of us may end up paying off our mortgages early! If that’s the case for you, congratulations! You can now decide whether you’d like to keep the plan in place, or cancel it.
There are no early cancellation fees or minimum terms to adhere to, so the process is nice and easy, but please understand that once cancelled, you will not receive a payout if you die (as you’re no longer covered!)
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Is mortgage life insurance compulsory?
Life insurance for mortgages: Things to know before buying
What kind of life insurance plan is right for me?
If your new mortgage is less, you may have the option to decrease the amount of cover you have, and in doing so, you’ll likely also decrease your monthly premiums. This process is typically quick and easy as it’s less risk for the insurer too!
Alternatively, if you think the difference might come in handy, then you also have the option to keep the existing amount in place.
If you have taken out a larger mortgage, you can chat to your insurer about increasing the amount on your existing plan. It’s not always possible for them to do so, however, so you may need to consider taking out a new plan to cover the difference, or purchasing a new plan entirely.
If you’re unsure of your options, please talk to an expert who can advise you on the best course of action. You can get a personalised recommendation from one of our advisers by calling us on
Decreasing term life insurance is available as either a joint policy or a single policy:
Unfortunately, there is no single answer that fits everyone and the cost of your decreasing term life insurance plan comes down to a number of factors, such as:
How much cover you would like
The term of the policy
How old you are
Your medical history
Your occupation - if high risk
Any hobbies - if high risk
This is a process called underwriting. Learn more about underwriting.
Generally speaking, life insurance is cheaper when you are young and healthy, so there’s no better time like the present to start looking into quotes!
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What can you do if you have a pre-existing condition when buying life insurance?
Does life insurance cover heart attack?
Mental health and life insurance - what to expect
If you are unable to pay your premiums, there are usually a few options available.
For example, if you are struggling to pay your premiums because you’re currently off work ill, and your plan includes waiver of premium, your insurer will cover your premiums for you and you won’t lose the cover.
Alternatively, they may be able to grant you some sort of payment holiday or repayment plan.
It’s important to speak to your insurer before making any decisions about your policy. They will be able to provide more information and advice on what options are available.
Because decreasing term life insurance has a start and an end date, it is possible to outlive the plan and therefore a payout is not guaranteed. For this reason, it is usually reasonably priced and one of the cheapest options available on the market.
Please note: The insurance products offered by Cavendish Online have no cash-in value at any time. If you stop paying your premiums your cover will stop, your policy will end, and you will receive no benefit. If you have not claimed before the end of your chosen policy term, the policy will end, and no benefit will be paid.
By default, if your plan were to payout, it would likely enter into your estate. For those with a smaller estate, this might not be an issue, but if the payout is going to take you over the inheritance tax threshold - currently £325,000 for the tax year 2022/2023 - then your payout could be subject to inheritance tax.
Learn more about inheritance tax on gov.co.uk
Thankfully, there is a way to combat this, and it’s called writing your policy in trust.
Writing your policy in trust is a simple process that involves filling out a legal form stating you’d like any payout to go straight to your loved ones, thus bypassing your estate.
Learn more about writing your policy in trust.
Whilst we’ve mentioned that decreasing term insurance is often purchased as mortgage cover, you don’t actually require a mortgage to set up a plan.
Decreasing term life insurance is also a good option if you feel like your financial liabilities will lessen over time.
Once you know roughly what you’re looking for, it’s time to pick your plan! There’s a few ways to go about this, to make sure you get the best deal possible.
If you’re in good health, don’t have a dangerous occupation/hobby, and you’ve got a good idea of what you’d like to have in place, then one of the simplest options available to you is to use an online comparison tool from a discount broker, like us!
On the other hand, if you have a medical disclosure, a dangerous occupation/hobby, or if you would simply like some extra help, then advice from a discount life insurance broker may be the way to go.
Give our advisers a call today.
Our team of friendly and professional advisers are on hand to help with any questions you may have regarding Life Insurance.
The advisers can also make recommendations tailored to your current situation and will research the market on your behalf, ensuring you secure the cover you need and supporting you every step of the way.
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