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…

What is decreasing term life insurance?

Decreasing term life insurance is a type of term life policy - which means it covers you for a set period of time. As previously mentioned it can also be known as mortgage life insurance. 

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.

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How does decreasing term life insurance 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.

Like any term life policy, your cover will only last a certain amount of years. When you take out a policy, you choose:

  •  The amount of cover (for example, how much is needed to pay off your mortgage)

  • The length of cover (for example, your mortgage term or how long you expect it to take to pay off your mortgage)

  • To add additional protection such as critical illness cover

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.

However, that doesn’t mean you shouldn’t consider investing in further life cover. Several policies can cover a mortgage which we’ll get to in a moment. These policies can help your loved ones with additional future finances such as:

  • Living costs

  • Household bills

  • Funeral expenses

  • Childcare support

  • Clearing other debts and loans

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Other types of life insurance for mortgages

Here are just some of the types of mortgage life insurance 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. 

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.

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