A type of life insurance policy called the “term” that has a specified term, or declining term, is one that provides life insurance coverage that will last for a set number of years. It is a good choice for covering the remaining balance on a repayment mortgage as the amount that would be payable if a claim was made decreases every year.
What does it mean for decreasing term insurance?
You have the option to choose how much coverage you want. The policy’s length will decrease each year until it reaches zero. You pay a monthly premium in return for this coverage.
The premium does not decrease. The premium is set at a specific amount to reflect the total cost of the policy. It then remains the same throughout the term of the policy.
A decreasing term policy is insurance whose coverage decreases according to the amount of outstanding debt you have, typically a capital & interests repayment mortgage.
It is more affordable than policies where the amount of coverage is not changed throughout the term because of how it is structured.
Who are you looking for term insurance that is less expensive?
For those who are only looking to pay a particular debt, it is best to reduce your term insurance.
This type of coverage will ensure that your loved ones can pay off the debt (usually a mortgage). Many lenders will insist on you having a life insurance policy before they offer you a mortgage. However, you are not required to purchase a policy from them.
However, decreasing term life insurance can only be used if your mortgage is repaid. If you have an interest-only mortgage, where you pay the interest monthly and repay the entire amount borrowed at once, it won’t work.
A term policy that guarantees a fixed amount at all times during a term of interest-only mortgage is called ‘level term insurance’.
You might also prefer a policy that covers your mortgage but leaves you enough money to pay for other expenses. Level term life insurance is more appropriate.
What is the difference between decreasing term and level term insurance?
If you die during the term of your policy, level term life insurance will pay out a lump sum to your dependents. With decreasing term insurance, the amount of payout decreases over the term.
If you need to protect your family’s ability to pay daily living expenses and household bills, level term insurance is the best option. However, decreasing term coverage may be better if you just need enough protection to cover outstanding debts.
It’s worth talking to an independent broker like LifeSearch if you aren’t sure what type of coverage is right for you. They can help you evaluate your options and recommend the best cover.
What length should decreasing term insurance last for?
A term should be at least twice as long as your outstanding mortgage or other debt. For example, if you have a 25-year mortgage, choose a 25 year decreasing term insurance policy.
What does decreasing term insurance cost you?
Since the amount of coverage you have decreases over time, decreasing term policy tends to be less expensive than level insurance. The amount that you pay for your premiums depends on:
- Your age
- Whether you smoke
- Your family’s medical history and health
- your occupation
- Choose the level of coverage you want
- The length of your policy.
The cost of life insurance will go up if you get older. This is because you have a greater chance of a claim being filed – your age will also make it more expensive. It can be a good idea to get life insurance as soon as you are young.
What amount of decreasing term life insurance do you need?
In order to calculate how much life insurance you will need, consider how much your current mortgage is worth and how much interest you are paying. It is important to make sure that your mortgage debt does not cause the coverage to fall faster than your current mortgage.
What other options are there for decreasing the term coverage?
You might also want to consider these options if you aren’t sure if decreasing term life insurance is right.
Level term life insurance: This pays a lump sum to your dependents if you die during the policy’s term. It can also be used to pay for household bills or other daily living expenses.
Increasing term life insurance: This is similar to level insurance. It pays a lump sum to your dependents if you are unable to work during the policy’s term. However, this policy is not as inflation-proof as level term insurance. Instead, the amount of coverage increases over time.
Family income benefit: Instead of paying out a lump sum, the family income benefit pays a monthly income tax-free to your family in the event that you are unable to work. This policy could be set up to provide sufficient funds to cover your mortgage payments or other regular expenses.
Whole-of-life coverage: Whole-of-life insurance does not pay out if you are unable to work for a certain period. Unlike term insurance which pays out only if you pass away within a set time, whole-of life insurance will continue to cover you until your death. Your loved ones will receive a payout if you die if you continue to pay your premiums.
This type of insurance is more expensive than term, as the possibility of a claim being denied can be expected to happen. The majority of whole of life insurance is purchased as part of an individual’s estate or inheritance tax planning.