For those of us with large financial commitments, life insurance can give a sense of security. It means that loved ones won’t have inherit the burden of paying off a huge mortgage, children will be supported through their education, or simply that funeral costs and inheritance tax are taken care of while people are trying to mourn.
Depending on what you want your life insurance policy to cover, as well as a range of other factors like your age and health, certain policies will be better suited to meet your needs than others. One form of cover is life assurance, which is taken out and covers you for a set number of years, say two decades. You then pay your premiums during the course of the term, and if you die during those 20 years your beneficiaries will receive a payout. With life assurance, this can be split into two categories: level term life insurance and decreasing term life insurance. It’s the latter of the two that we’ll be talking about.
Decreasing term life insurance: explained
Before you take out a policy, you need to decide how many years you’d like it to cover. This can be worked out based on a number of factors, from the length of your mortgage to the average life expectancy in your family. Basing life insurance terms on mortgage length is common with decreasing term policies, as it gives you the peace of mind that your loved ones won’t be left with a huge debt if you pass away before you’ve finished paying it off. But likewise, the premiums can shrink as the remaining mortgage debts also decreases with your payments, so you’re unlikely to be over-insured. The amount of money covered by your policy shrinks because decreasing term life insurance gives a smaller payout the further through the policy you are. For example, you could take out a 20-year policy for £75,000. If you die in the first year of cover you’ll receive the whole amount, but if you die in the 19th year of cover, you may only receive a couple of thousands of pounds. The good thing about this type of policy is that the premiums will also decrease.
Who is it most suitable for?
For those with a smaller income, a decreasing term life insurance policy is a good choice of cover, as premiums are significantly cheaper than those for a level term policy. Premiums also decrease over the course of the policy term, making this an even more affordable option.
A decreasing term life insurance plan is also a great option for those who expect to live to a ripe old age. While there are plenty of elderly life insurance plans available, having decreasing term cover is a great way of planning for inheritance tax. You can tie your decreasing term policy to your inheritance tax, so that over time less tax is due.
Family income benefit policies are a type of decreasing term life insurance. The difference is in the way the insurance policy pays out. Rather than giving your loved ones a lump sum in the event of your death, this policy gives them a regular income for the duration of your cover term. For example, if you die in the 5th year of a 20-year family income benefit policy, your family will receive a regular payment every month for 15 years. The downside is that if you die in the 19th year of the policy, your family will only receive one year’s worth of payments. This type of policy is well-suited to families with small children as it mirrors an income.
There are many reasons why a decreasing term life insurance policy is right for you. But it may not actually be the perfect choice. That’s because:
- Decreasing term policies will only pay out if you die during the term of cover. So, should something terrible happen just after your policy has ended, your loved ones will get nothing.
- Similarly, should you outlive your life insurance policy, you are not entitled to get any of your money back. That’s because there is no investment element to decreasing term life insurance policies. What’s more, if you then decide that you’d like to take out a whole-life policy, or even take out a second decreasing term policy to cover you for the next couple of decades, it will be significantly more expensive. That’s because life insurance premiums become more expensive the older you are when you take out a policy. Therefore, it may be worthwhile simply taking out a whole-of-life life insurance policy from the beginning; especially if you have a large family and lots of dependents.
- As your life insurance policy decreases over time, it should mirror the amount of debt that you want it to cover. However, there’s no guarantee that your cover can perfectly correspond with your policy. If you’re prone to making large purchases or expect to move to a new house and need a second mortgage in a number of years, then a level term life insurance policy may be a better way to give your loved ones a large cash sum that can cover any debts you have in the future.
Alternative types of life insurance
After looking through the disadvantages of a decreasing term life insurance policy, you may feel that it’s not the best type of cover for your situation. Other types of policy to consider include a level term life insurance policy and a whole-of-life policy. The first involves a set price premium, which gives you the same sized payout no matter how far through the policy you are. If you’re insured for £100,000, this is the amount you’ll get if you die on the first or last day of your cover. The second type is a policy that doesn’t expire. A whole-of-life policy is not chosen to cover a set number of years like a level term or decreasing term policy; it is valid until the day that you die. This type of cover is generally more expensive than other forms of cover, as it’s guaranteed to pay out in the future.