What is decreasing term life insurance?

Life insurance can be used to help your family cover a variety of finances for when you are no longer around. One type, in particular, is decreasing term life insurance - also known to insurers as mortgage life insurance. Unlike a typical ‘level term’ life insurance policy, decreasing term cover works slightly differently. 

In this article, we’ll talk you through how it works, as well as the other types of policies that can be used to cover a mortgage…

Decreasing term cover explained

Decreasing life insurance is a type of term life policy - which means it covers you for a set period of time.

If you were to die before your mortgage has been paid off, your family may struggle to do so on their own. Therefore, it provides your family with the necessary finances to cover the outstanding balance, providing peace of mind.

It could be a good option if:

• You have a repayment mortgage
   

• You have another type of fixed-term loan

However, if you have an interest-only mortgage, decreasing cover may not be a suitable choice as the amount owed won't decrease over time. In this case you may be better suited to a policy that will pay out a fixed sum.

How does decreasing term cover work?

This type of policy is usually taken out alongside a ‘repayment’ type mortgage. As your outstanding mortgage balance decreases over time, the pay-out value of your policy decreases too (usually by a set percentage annually, which is stated at the start of your policy).

When you die a cash lump sum is paid out to your family to cover a repayment mortgage. It could also pay out if you are diagnosed with a terminal illness, with a life expectancy of 12 months - this depends on the insurance company, so check your policy documents for more information.

Just like with any type of mortgage life insurance, you pay monthly premiums to your insurer. If for whatever reason you fail to keep up with your monthly payments, your insurer has the right to end your cover. In this case, you won’t receive anything for the premiums paid previously and would need to reapply if you wanted cover at a later date.

Can I get joint mortgage cover?

It’s possible to get mortgage life cover for both you and your partner with joint life insurance. A joint policy covers two people under a single policy, perfect for couples who both share the financial responsibility of their home. 

Joint life cover on a 'joint life first death' basis pays out after the first death of one of the policyholders. This way the surviving policyholder can use the pay-out towards mortgage repayments, should they so wish. Joint life cover can also be set up to pay out when both policyholders have died (I.e. cover on a ‘second death’ basis).

What happens once my mortgage has been paid off?

The concept of decreasing term policies is that once your mortgage has been paid off, it no longer requires cover. The payout from a decreasing term life insurance policy decreases alongside your mortgage, as mentioned earlier.

Other types of cover for mortgages

Here are just some of the types of mortgage protection that provide additional benefits alongside mortgage cover…

Whole life insurance

With whole life insurance (aka life assurance) your policy runs for the remainder of your life. Regardless of when you die a lump sum is paid out to your loved ones to support them during this difficult time.

Both your payout value and premiums are fixed throughout your cover. Even as you get older or develop health conditions, you’ll still pay the same for premiums. With this in mind, it’s best to get cover when you are young to lock in cheaper premium costs.

As a whole life cover isn’t directly linked to your mortgage balance, you’ll still be covered even after your mortgage has been repaid. That way your family is still supported with future costs as we mentioned above. 

Whole life insurance is generally more expensive than term life policies. This is because it provides permanent cover with a guaranteed payout - so long as you keep paying your premiums.

Level term life insurance

Just like a decreasing term policy, level term life insurance has a specified policy term. However, with a level term life insurance policy your potential pay-out (the ‘sum assured’) will remain the same for the duration of the policy. Again, with a term based life insurance policy, your claim is only valid if you die during this term. If you reach the end of your policy term without making a claim then the policy will simply end with no premiums being paid back to you. 

Again, with a term based life insurance policy, your claim is only valid if you die during this term. If you reach the end of your policy term without making a claim then the policy will simply end with no premiums being paid back to you.

However, in most cases, level term cover like most term life policies work out cheaper than a whole life policy. The downside is that you are only covered for a set amount of years - something worth considering before you buy.

For more information on how to get your perfect life insurance quote with Cavendish Online check our section on how to apply.

Income protection

While life insurance covers you in the event of death, income protection could cover you in the event that you are unable to work due to illness or injury. This type of cover can provide a monthly income so that you can continue to pay your mortgage, as well as other expenses whilst you're unable to work.

Like term life insurance, the policy has a set term. You'll continue to receive financial support until your policy term ends, or once you've returned to work or died - whichever happens first.

When you make a claim you enter your 'deferment period' and will need to wait for a certain amount of time before you receive the monthly benefit. This could be from one day to two years depending on the provider's policy.

Critical illness cover

You may also be unable to work if you become critically ill, in which case critical illness cover could be of help. This type of policy pays out a lump sum should you be diagnosed with a serious illness, like cancer or heart disease.

Unlike income protection (which pays out a monthly benefit) you have the flexibility to use the lump sum where needed such as paying off your mortgage. You usually have the option to add cover to a life insurance policy or as a standalone policy.

Note that not all illnesses are covered, so make sure to check what's covered before you commit to a policy.

For more information on how to get your perfect life insurance quote with Cavendish Online check our section on how to apply.