Decreasing Term Mortgage Life Insurance

Decreasing term mortgage life insurance provides a cash lump sum to pay off your outstanding repayment mortgage should the worst happen. With decreasing term life insurance the level of cover declines over time in line with the amount outstanding on your home loan.

The alternative to decreasing mortgage life insurance is level term insurance, which provides a fixed level of cover and is designed for interest only home loans. Naturally, as the amount of cover falls each year with decreasing term insurance there is a reducing amount of risk for the insurer and therefore premiums are far lower than for a level term plan.

How Does Decreasing Life Insurance Work?

As mentioned above, the purpose of decreasing term mortgage life cover is to protect a principal repayment mortgage loan as the amount of cover decreases over time so as to stay in-line with the amount of debt outstanding on the loan, which is the most cost-effective method of gaining this type of life protection.

In order for the amount insured under the plan to decline over time the policy assumes an interest rate. If this policy interest rate is set equal to your mortgage interest rate the cover will decline exactly. In reality most plans automatically assume an interest rate of 8 per cent to 10 per cent to allow for fluctuations in your loan interest rate over time.

For more information, please see the full post: How Does Decreasing Term Life Insurance Work?

Decreasing Term Life Insurance Options

Joint Cover
If you have a joint home loan then it is perfectly reasonable for you to want to take out joint mortgage life cover with your partner to protect that loan.

The joint decreasing life insurance policy would payout the full amount upon the death of the first partner, leaving the other partner with the necessary funds to repay the loan. As the remaining policyholder would receive the payout directly there is no need to write the policy into trust for tax avoidance reasons (the insurer’s payout would be free from taxation).

Mortgage Critical Illness Insurance
There is the option to include critical illness cover with your policy, this would payout a lump sum if you were to suffer a critical illness specified in the policy document.

Leading policies include approximately 35 critical illness conditions, including cancer, heart attack and stroke. Please note that if the combined life and critical illness policy pays out due to either a critical illness condition or a life claim the policy would then terminate.

Waiver of Premium
Including the waiver of premium option means that the insurer will ‘waiver’ your monthly premium payments if you were to suffer illness or injury and therefore be unable to earn an income. Without the waiver of premium option you would run the risk of missing premium payments and therefore losing your mortgage cover if you lost your income due to sickness or injury.

Including waiver of premium adds around 2% to 4% to the monthly premium charged. Please note that there is often an excess period of around six months before the waiver of premium would kick in, but once it does begin it can last until you either return to work or the decreasing term insurance policy ends.

Family Flexibility Benefits

A number of insurers offer increased flexibility options with their decreasing term life insurance plans. These options give the policyholder the choice to increase the level of cover without further medical underwriting due to specific lifestyle events.

Options to alter your protection
For example, common lifestyle events include moving house, home improvements or the birth of a child. It is also common for these life plans to include a separation option to form two new policies without further medical underwriting if a couple were to part ways. If your policy includes critical illness cover there is usually a certain level of child cover included as standard.

The children’s critical illness benefit is usually the lesser of £20,000 or 50% of the critical illness cover included in the policy. Please note that these family flexibility benefits do vary from provider to provider so you should always check the policy wording document.

Next Steps

If you would like some more information, some guidance or simply want to compare decreasing mortgage life insurance quotes from the leading insurers, please do not hesitate to get in touch we are here to make your life easier. For more information please visit our dedicated mortgage life cover page.