What if there was a life insurance policy that is specifically structured to pay off your family debts, such as mortgages and loans? This type of policy exists, and it’s called a decreasing life insurance policy. Read on to learn the details of decreasing life cover and how the Moneysprite life insurance advisers can help you find appropriate insurance deals.
What is decreasing term life insurance?
Decreasing term life insurance is a life insurance policy that pays out less the longer you live. If you die early in the early stages of the policy, beneficiaries will receive a larger lump sum than if you die towards the end of the agreed term.
This is different to increasing term life cover that pays out more as you get older as a way to keep up with rising inflation.
What are the advantages of a decreasing term policy?
The advantage of using decreasing term life cover is to ensure family members can pay off the household’s financial commitments, which are typically significant in the early stages of life and decrease as you get older. For example, you are likely to have larger mortgage and debt payments to make in your 40s and 50s, which is eventually paid off as you get older.
If you take out decreasing term life insurance, you structure the policy to cover your family’s bigger financial obligations in the early stages and the policy’s payout decreases in line with your family’s decreasing financial obligations.
What are the disadvantages?
There are some drawbacks to using any type of life insurance. The disadvantage of a decreasing term policy is that the payout decreases all the way to £0, meaning your beneficiaries may not receive any money at all. However, if they have been structured correctly, you should also leave beneficiaries with no outstanding debts.
Another disadvantage that won’t be applicable to everyone is that these policies are often capped at 6-8%. If the interest rate on your mortgage is above the capped rate, then the lump sum paid out may not completely clear your family’s mortgage.
Who might it not be appropriate for?
Some people are not suitable for a decreasing life insurance policy based on the way their financial obligations are organised. If you have an interest-only mortgage, opting for a decreasing term policy would be a bad idea.
An interest-only mortgage is a mortgage where only interest payments are made, and the principal amount is due at the end of the mortgage term. Interest-only mortgages place the largest financial obligation in later life, and therefore conflict with the way a decreasing term policy pays out less as you get older.
Things to consider
When looking for decreasing life insurance quotes, you need to consider many factors, not limited to:
- Debs and financial commitments you need to protect against
- How much you need
- How long you need the cover for