This is a guest post from award-winning UK life insurance broker; Reassured.
Decreasing life insurance is typically the cheapest form of life insurance. (Great for parents who have better things to spend our money on).
This is because the risk to the insurer reduces over time as the value of the sum assured reduces over the term of the policy.
As a result, it is ideal for covering the outstanding balance of a repayment mortgage as it can be set to decline at the same rate as your outstanding balance.
But why would you choose decreasing life insurance over various other types available?
The cost of decreasing life insurance
The biggest advantage of decreasing life insurance is the cost.
Like all life insurance types, the cost of monthly premiums is calculated based on a number of personal factors;
- Age (the older you are, the higher your premium)
- Smoking status
- Type of cover
- Sum assured.
The insurer will take these various factors into account and calculate the cost of your cover based on the likelihood you will make a claim.
Due to the declining value of the sum assured when it comes to decreasing term insurance, risk is already mitigating throughout the period of the policy meaning insurers can charge less for this type of cover.
Decreasing vs. level
Decreasing term life insurance is a form of term life cover. Meaning the policy is valid for a specified amount of time.
There is another form of term life cover know as level.
This type of cover also only remains in place for a specific amount of time, however, the sum assured doesn’t diminish over time.
As a result, it is ideal for an interest only mortgage, inheritance or to help cover the cost of your funeral.
Due to the risk associated with level term life cover remaining the same throughout the period of the policy, this form of life protection tends to be more expensive than decreasing term life insurance.
Mortgage life insurance
Decreasing term life insurance is often used interchangeably with the term ‘mortgage life insurance’.
This is because this form of life insurance is typically used to cover a repayment mortgage, where the pay out sum can be set to decline at the same rate as the outstanding balance.
However, dependant on the type of mortgage you have in place, this may not be the best form of cover available to you.
An interest-only mortgage, however, may be best covered by level term life insurance where the sum assured doesn’t diminish over time.
Therefore, the best type of life insurance to suit your mortgage needs will depend on the type of mortgage you have in place.
Decreasing term life insurance with terminal illness cover
Nowadays, it is more common than not for all decreasing term life insurance policies to come with terminal illness cover as standard.
This means that if you are diagnosed with a terminal illness, and predicted to die within 12 months, you can make an early claim on your policy.
This early pay out can then be used to pay for private medical treatment, to get your financial affairs in order or to simply enjoy your final days with your loved ones.
It is important to remember than once a terminal illness pay out has been made the cover terminates.
Decreasing term with critical illness cover
As already stated, decreasing life insurance is typically used to cover the cost of a repayment mortgage.
However, being diagnosed with a critical illness can cause such implications as, no longer being able to work or having to pay for additional private medical treatment.
Arranging critical illness cover alongside your life insurance means that if you were to be diagnosed with a serious, yet not terminal, illness you could receive an early pay out on you policy.
This early pay out can then be used to cover mortgage repayments, make necessary adaptations to your home or to enjoy with those closest to you.
It is important to remember though, that a life insurance policy with critical illness will expire if you are to claim on the critical illness element.
So, is it the right choice?
The decision to arrange decreasing life insurance will be based on your own personal circumstances.
It will be based on what it is you are looking to cover, the type of pay out best suited to offering that form of protection and the budget you have available to pay for life insurance.