Decreasing Term Life Insurance – Your Guide

Paying your mortgage so your dependents don’t have to

Buying your first home and committing to a long-term mortgage loan to pay it off before it can truly belong to you, can be one of the most exciting and daunting things you will undertake in your lifetime as an adult. One of the things we don’t often think about however, is what will happen if we die before it’s paid off.

We can all visualise our lives stretching out before us, but imagine if it were cut short through no fault of our own. An unexpected death or a terminal illness where you are expected to die within 12 months, can wreak havoc on a family, especially if partners are left with hefty bills to pay and the uncertainty of whether they may lose the roof over their heads, especially if there are children involved may be too much to bear when added to the trauma of losing a loved one.

Looking on the bright side – there’s one small thing you can do that will make an enormous difference should the worst happen. Taking out a life insurance policy that will pay out a tax free lump sum that wipes away the amount you owe on your mortgage, means those you leave behind won’t have the burden of paying the monthly mortgage payments and risk losing the roof over their heads, at the same time as losing their loved one.

Decreasing Term Life Insurance does exactly that – and with premiums as affordable as a coffee and a croissant, you’ll hardly notice them coming out of your bank account.

Decreasing Term Cover – for the Mortgage

Decreasing Life Insurance is also known as mortgage life insurance because it tracks alongside your repayment mortgage, and clears the remaining mortgage balance if you die before you’ve paid it off. Most mortgage providers will insist on their customers having sufficient life cover on this basis, so that if the worst happens, your mortgage debt is covered.

This type of life insurance only works if you have a repayment mortgage because the amount paid out on your death reduces during the policy term in alignment with the balance on your mortgage.

This type of life cover doesn’t work on Interest only mortgages because the payout on your death won’t be enough to clear the whole of the capital remaining at the end of the mortgage term. If you have an interest only mortgage then a Level Term Insurance policy that pays out the same amount at the beginning, middle and end of the policy term would be a better option.

Is Decreasing Term Life Cover Right for me?

Decreasing Term Life Insurance is a good choice for most people with a repayment mortgage. One of the biggest benefits is that the premiums are cheaper than other types of life cover.

One of the benefits of decreasing term life cover is that you only pay for the cover you need as long as you need it for. So if you’ve just bought your first house and have a repayment mortgage, then chances are your monthly outgoings will be quite tight.

A decreasing term policy would therefore be the right choice for you because it’s the most affordable and simplest way to protect your family if you were to die suddenly or be diagnosed with a terminal illness during the lifetime of your mortgage.

If you’re single with no children, you may not need decreasing life insurance to cover the outstanding mortgage because whoever inherits your property can sell it and clear the mortgage balance that way. On the other hand – it will make things easier on them if the mortgage balance is cleared first.

You can also choose to add Critical illness cover to your policy which will provide the extra peace of mind that the mortgage will be paid off in the event of a critical illness diagnosis.

However if you do have dependents living in the property that are reliant on your income, then this is the most cost effective way to protect them, and guarantee that the property will not be repossessed if the mortgage cannot be paid. Another thing to consider though is that as your children get older, they become less dependable on you, your home and your income.

You may have other life cover you could use instead – such as Death In Service Benefits through your employer so it would be wise to check first. However this may not be enough to cover your mortgage, so it’s best not to rely on that, especially if you leave the company, so taking out a Decreasing Term Insurance Policy in addition would be an advantage.

Check with your insurance company whether you already have Level Term Life Insurance. This will pay out a tax-free lump sum determined at the start of the policy. It will pay out the same amount whether you die at the beginning, middle or end of the term.

Is Decreasing Term Life Insurance Enough?

It’s important to question whether a Decreasing Term Policy will be right for you in the long term. As the amount paid out decreases over time during the course of the policy, and your cost of living and borrowings increase, you may need additional life insurance to cover your debt and outgoings if you die.

Some people choose Level Term Insurance instead. With a Level Term Insurance policy the payout amount stays the same throughout the entire term of the policy. This type of cover will wipe out the balance of your mortgage if you die during the term and there will still be some left over to clear any other debts.

If you took out mortgage cover a while ago, some things may have changed. You may have borrowed some of the equity in your property to make home improvements. This will mean your mortgage balance will have increased, therefore you will need to make sure your decreasing term policy will be enough to pay your new mortgage balance.

The interest rate on your mortgage may change during a mortgage term, especially when you look to fix and then re-fix your interest rate. Insurers will cap their decreasing term life insurance policies at between six to eight per cent. This means if the interest rates rise higher than this, the insurance payout may not be enough to cover the capital if you die.

You need to make sure you are taking out enough life policy to cover your mortgage. For example, if you have a £175,000 mortgage over 25 years, you will need a policy that will pay out enough to wipe out the balance if you die. We can help you calculate the number of years your policy should run for.

Now might be the time to shop around for a replacement policy. Bear in mind that your premiums may increase as you will now be older than when you first took it out, and your medical conditions may have changed.

Guaranteed or Reviewable?

When buying mortgage life cover you will be asked whether you would like your premiums to stay the same throughout the mortgage term (ie the insurer guarantees that your monthly premiums will stay the same during the term of the policy), or be reviewed.

A reviewable premium choice may be cheaper at the start of the policy term, however the insurer reserves the right to review your premiums regularly during the lifetime of the policy and increase the premium. The reason they will do this is to reduce their own exposure to risk and financial loss.

Always double check the terms and conditions of the policy to make sure you know what you’re signing up for. It’s always advisable to speak to a reputable insurance adviser that has a registered office, registered in England.

Reputable Advice and Guidance

Mortgage Life Cover is affordable and easy to arrange – however shopping around for life insurance quotes and completing online quote applications can be time-consuming and confusing, so it’s best to let a professional adviser handle this for you.

So you could talk to us instead. We have a sound knowledge of the life insurance market and can help you choose a policy from one of the robust and reputable insurance companies we have good relationships with. We’ll give you a comprehensive view of the insurance companies we use to help you choose the right Decreasing Term Life insurance that will see you through your mortgage years.