Have you considered decreasing life insurance?
Today, the market is flooded with multiple types of life insurance policies, making it difficult for consumers to decide which is best for them. One such policy is the decreasing term life insurance. It’s a subset of term life insurance which also comprises the level term cover. Most people tend to confuse the two but that stops now.
In this short guide, we will answer the following questions about decreasing term life insurance:
- What is decreasing term life insurance?
- How does it differ from the level term insurance?
- How does it work?
- What are the benefits of decreasing term life insurance?
Ready? Let’s go!
What is decreasing term life insurance?
Decreasing term life is a type of life insurance policy that promises to support your loved ones financially should you pass away during the contract period. Only this time, the possible pay-out reduces as time elapses.
Put otherwise, if you were to pass away near the start of the policy, your beneficiaries would receive more pay-out than if you were to pass closer to the end.
A beginners guide to decreasing life insurance
How does decreasing term life insurance work?
Understanding how decreasing term life insurance works is key if you’re to take full advantage of the policy. For starters, you purchase the policy for a specific period referred to as the “term”. You are then required to pay fixed premiums as agreed with the insurer. The amount payable by the policy declines over time such that by the end of the contract term, this amount falls to zero.
Here’s an example;
Let’s say you purchase a 20-year decreasing term life insurance policy valued at £800,000 and has an annual reduction rate of 5%. Should you pass away within the first year of the contract, your beneficiaries will receive £800,000 as a pay-out benefit.
However, if you pass away in the second year, your beneficiaries would be entitled to a pay-out worth the original face value minus the 5% reduction, which totals to £760,000. This trend carries on until the 20th year when the amount payable reduces to zero.
How decreasing term differs from level term life insurance
To begin with, these two policies are subsets of term life insurance. When it comes to level term life insurance, you decide how long you want to get covered and how much you’d like the policy to pay out. If you pass away within your chosen contract term, the policy pays out a lump sum amount to your surviving loved ones.
Decreasing term life insurance works a bit differently and is mostly used to protect a mortgage. The idea is that upon your demise, the policy settles the outstanding amount to ensure your dependents do not lose their home.
Worth mentioning though is that premium payable remains the same throughout the contract terms for both life policies.
A beginners guide to decreasing life insurance
Why consider buying a decreasing term life insurance plan?
Most people take out this policy to guarantee a specific debt coverage – usually a mortgage. The amount covered decreases as you keep repaying the mortgage liability. So suppose you pass away within the contract period, your loved ones can use the policy’s pay-out to clear the outstanding amount.
In fact, a lot of mortgage lenders today insist that you buy a life insurance policy to guarantee they will get repaid in full no matter what happens to you. However, this policy doesn’t work if you have an interest-only mortgage. Such mortgages require that you repay the full amount once the term elapses. This means they’re less likely to be covered under decreasing term life.
What are the benefits of decreasing term life insurance?
Here are some excellent reasons why you’ll love this policy:
Decreasing life insurance is comparatively less costly than level term insurance and still guarantees to protect your loved ones upon your demise.
Coverage for temporary needs
If you have a mortgage or need to secure your young children’s education, decreasing term life insurance provides financial protection over the period of your most need.
Protect your private assets or business
In case you pass away before meeting all your financial obligations, this cover can provide the much-needed backup. Your loved ones can use the benefits pay-out to repay loans, debts, or other expenses.
Conclusion – A beginners guide to decreasing life insurance
The core reason for taking out any life insurance is to provide financial security to those left behind in case of an unforeseen occurrence. Decreasing term life insurance policy is no different. If you wish to keep the creditors and mortgage lenders from knocking at your family’s door once you’re gone, this policy is the lifeline you need!