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How does decreasing term life insurance work?

Decreasing term life insurance is a life insurance policy that is useful for a short period of time. It is a term-life insurance policy where the coverage decreases over the life of the policy (a set period of time between 1 and 30 years). Premiums remain the same throughout the policy term, but over time, the payout amount will reduce either monthly or annually.

Level term or decreasing term?

Term life insurance is one of the most common types of life insurance policy that is purchased. It insures the individual for a set period of time which is normally 5, 10, 20 or 30 years. The insurance provider will then pay out the sum of money if you were to pass away before the end of the policy term. For a level term insurance policy, the premium amounts stay the same until the end of the term and so does the sum assured.

With a decreasing term life insurance policy, however, the cover amount reduces over the course of the policy term. The premiums remain the same over time. Due to the decreasing amount of cover, the premiums are usually cheaper than level term life insurance.

Why would I need decreasing term life insurance?

Life insurance is purchased normally to cover a mortgage, debts or loan and to make sure there is money available to your family if you were to pass away. Over time, those debts and loans tend to decrease as you pay them off

Most people would purchase a decreasing term life policy to fall in line with the rate that these loans are being paid off. As their debts decrease, so does the need for a life insurance policy to cover that.

It’s not always to cover a mortgage or debt, but some people will increase their assets over time or work towards saving towards their retirement. Perhaps they may find a higher paying job or increase their savings and feel that the need for life insurance will be less in 20-30 years than it will be during the next 10.

retirement pot

Does the insurance decrease by the same amount each time?

Typically, your decreasing term life insurance policy reduces similarly to a mortgage. It starts off slowly and gradually increases towards the end of the policy. The amount that it reduces by tends to depend on the interest level that you choose. Typically, the higher the interest amount, the higher the payout at each point in the policy.

What will affect the cost of my insurance?

With decreasing life insurance policies, they work similarly to the way that a level term insurance policy would work. Insurance providers and underwriters will take into consideration:

  • How much cover you wish to get
  • The term that you take out the cover for
  • You age at the time of starting the policy
  • Your current health and lifestyle
  • Your medical history
  • If you are a smoker

Main benefits of decreasing term life insurance cover

Decreasing term life insurance is suitable for those wanting to protect a mortgage, cover a debt or a loan or are looking to purchase a house. This is due to the fact that debt decreases over time based on repayment schedules so the need for coverage reduces alongside the debt. One of the main benefits of decreasing term life insurance is that you would pay less than a level term insurance policy. It suits those that want to ensure their family is protected but understand they may not need protection for a long period of time.

For businesses, a decreasing term life policy is beneficial to protect business assets. It can help to protect against startup costs and operational expenses until the business is profitable. It can also be used to cover a business loan until you are able to pay it off.

Decreasing term insurance is a short-term protection policy available to those who need it.

For more information regarding decreasing policies or any other type of policy, please do not hesitate to get in touch.

***Please note the above does not constitute financial or other professional advice and is general in nature. It does not take into account your specific circumstances and should not be acted on without full understanding of your current situation and future goals and objectives by a fully qualified financial advisor.***

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