17 November 2018

Why choose decreasing cover?

3 min read



For anyone not familiar with the details of life insurance, a policy known as decreasing cover does not sound like an attractive option. The name of the policy makes it sound as though it might leave you short.

However, there are very real reasons to choose this type of policy – so it certainly pays to understand how it works. Here are the facts to help you make up your mind. 

What is decreasing cover?

As the name suggests, the payout from a decreasing-cover policy get smaller over time. So if you take out a policy for, say, 20 years and you die seven years into it, your family will receive more than if you died 16 years into the term. In this way it differs from level term insurance, where the payout from the policy is the same regardless of when death occurs during the term, and increasing term insurance, where the payout actually gets larger.

The amount you pay each month for the policy remains constant over time. But the amount that dependants might receive from the policy decreases either monthly or annually at a set rate.

Why would you choose decreasing cover?

Given that the cost of living rises every year, why might you choose a policy that pays out less as time goes on? The first reason is that a decreasing-term policy might fit your family’s need for protection, depending on how your living costs are forecast to change in future. Another reason is cost; decreasing term life insurance is usually cheaper than other types of insurance. 

Protecting a mortgage and other debts

This might be the case if you have a repayment mortgage or other type of loan, where the amount you owe decreases every year because you are paying it back. For example, if you took out a £250,000 repayment mortgage over 25 years with an repayment rate of 3 per cent, the amount you owe would have dropped to around £153,000 by year 12.

So if you had taken out a decreasing-term policy to pay off your home loan in the event of your death, the amount needed would have decreased dramatically by year 12, making such a policy a valuable solution.

The same goes for families where high costs – for childcare, for example – are expected to reduce after the children start school, meaning that a lower payout might be suitable.

When it isn’t right

Decreasing-term insurance is not for those who want a guaranteed payment on death; for this you need a whole-of-life policy. And it’s not really the right type of cover if you want to pay off an interest-only mortgage where the amount you owe will remain constant over time. 

Royal London offers a range of life insurance products.

Find out more here. Looking for more information on Decreasing Life Insurance?

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