Decreasing life insurance, also known as mortgage life insurance, is a type of term life insurance policy designed to help protect your loved ones financially if you pass away. The amount of cover decreases over time, typically in line with the outstanding balance on a repayment mortgage. This makes it an affordable option for many people looking to ensure their family can pay off the mortgage if the worst were to happen.
In this article, we’ll explore the benefits of decreasing life insurance, how it works, and factors to consider when choosing a policy. We’ll also provide a helpful calculator to determine the amount of cover you might need based on your specific circumstances.
Contents
How Decreasing Life Insurance Works
When you take out a decreasing life insurance policy, you choose the amount of cover you need and the term of the policy. The term is usually aligned with the length of your mortgage, so if you have 25 years left on your mortgage, you would choose a 25-year term.
The amount of cover decreases over the term of the policy, usually on a monthly or annual basis. This decrease is calculated to match the outstanding balance on a repayment mortgage, assuming a fixed interest rate. If you were to pass away during the term of the policy, the payout would be the amount of cover remaining at that time, which should be enough to pay off the outstanding mortgage balance.
Benefits of Decreasing Life Insurance
There are several key benefits to choosing a decreasing life insurance policy:
- Affordability: Because the amount of cover decreases over time, decreasing life insurance premiums are typically lower than level term life insurance policies, where the cover remains the same throughout the term.
- Mortgage protection: Decreasing life insurance is designed specifically to cover the outstanding balance of a repayment mortgage, providing peace of mind that your loved ones won’t have to worry about mortgage payments if you’re no longer around.
- Flexibility: You can choose the amount of cover and term that best suits your needs and budget, ensuring you have the right level of protection in place.
Factors to Consider When Choosing a Decreasing Life Insurance Policy
When selecting a decreasing life insurance policy, there are several important factors to keep in mind:
- Amount of cover: Choose an amount of cover that aligns with your outstanding mortgage balance and any additional expenses you want to cover, such as funeral costs or outstanding debts.
- Term length: Ensure the term of your policy matches the remaining term of your mortgage.
- Interest rate: The interest rate used to calculate the decreasing cover amount should be close to your mortgage interest rate to ensure the payout will be sufficient to cover the outstanding balance.
- Premium affordability: Consider your budget and choose a policy with premiums that you can comfortably afford over the long term.
- Provider reputation: Select a reputable life insurance provider with a strong track record of paying claims and providing excellent customer service.
Decreasing Life Insurance Calculator
To help you determine the amount of decreasing life insurance cover you might need, we’ve created a simple calculator. Simply input your outstanding mortgage balance, remaining mortgage term, and interest rate to see an estimate of the cover amount required.
Please note: This calculator is for professional use and illustrative purposes only and should not be relied upon by any private individual or other person. Full breakdown of claims examples for Decreasing Life Insurance products are issued with policy documents. Please consider the interest rate required, which would normally be the standard variable rate of the lender, NOT an introductory interest rate such as a discounted or fixed rate.
Here are some examples of how decreasing life insurance cover decreases over a 25-year term with a 10% interest rate:
| Year | Amount of Cover |
|---|---|
| 0 | £100,000 |
| 5 | £94,164 |
| 10 | £84,561 |
| 15 | £68,762 |
| 20 | £42,768 |
| 25 | £0 |
| Year | Amount of Cover |
|---|---|
| 0 | £150,000 |
| 5 | £141,246 |
| 10 | £126,842 |
| 15 | £103,144 |
| 20 | £64,153 |
| 25 | £0 |
| Year | Amount of Cover |
|---|---|
| 0 | £200,000 |
| 5 | £188,328 |
| 10 | £169,123 |
| 15 | £137,525 |
| 20 | £85,537 |
| 25 | £0 |
| Year | Amount of Cover |
|---|---|
| 0 | £250,000 |
| 5 | £235,409 |
| 10 | £211,403 |
| 15 | £171,906 |
| 20 | £106,921 |
| 25 | £0 |
| Year | Amount of Cover |
|---|---|
| 0 | £300,000 |
| 5 | £282,491 |
| 10 | £253,684 |
| 15 | £206,287 |
| 20 | £128,305 |
| 25 | £0 |
| Year | Amount of Cover |
|---|---|
| 0 | £500,000 |
| 5 | £470,819 |
| 10 | £422,807 |
| 15 | £343,812 |
| 20 | £213,842 |
| 25 | £0 |
Conclusion
Decreasing life insurance is an affordable and practical way to protect your loved ones financially if you pass away, particularly if you have a repayment mortgage. By choosing the right amount of cover and term, you can ensure your family will be able to pay off the mortgage and maintain their standard of living, even if you’re no longer around to provide for them.
When considering decreasing life insurance, use a calculator to estimate the cover you need, and compare quotes from multiple providers to find the most suitable policy for your circumstances. Always consider factors such as the interest rate, premium affordability, and provider reputation when making your decision.
Remember, the calculator provided in this article is for illustrative purposes only and should not be relied upon by any private individual or other person. Full breakdown of claims examples for Decreasing Life Insurance products are issued with policy documents, and you should consider the interest rate required, which would normally be the standard variable rate of the lender, not an introductory rate.
By understanding the benefits and factors involved in decreasing life insurance, you can make an informed decision about protecting your family’s financial future.