What is decreasing life insurance?
Term insurance is the most popular kind of life insurance and there are three main types; increasing-term life insurance, level term life insurance, and decreasing life insurance. In this article we will look at decreasing-term life insurance, specifically:
• What is decreasing life insurance policy?
• Why should you get decreasing-term life insurance?
What is decreasing term life insurance?
Here are some answers to the questions that people ask about ‘decreasing term life insurance’ or ‘mortgage life insurance’.
What is it?
If you want life insurance for a specific amount of time then you may be considering taking out term insurance. If you pass away within the term then your loved ones will receive a pay-out. This can help your loved ones financially in an often stressful and troubled time.
Term cover will insure you within the term agreed only. If you live beyond the end of the term then the policy will simply come to an end.
Decreasing-term life insurance is a type of term insurance where the pay-out on the cover reduces as the term progresses. For this reason, this is often much more affordable than other kinds of term insurance.
How does it work?
As with other types of term insurance, you buy decreasing-term life insurance for a specific amount of time, for example; 25 years. You then pay regular sums of money into this policy throughout the term. These are called “premiums” and can be paid monthly or every year. If you die within this agreed time period, then your loved ones will receive a lump sum of money.
Decreasing-term life insurance, in particular, has less expensive premiums because of the type of pay-out. The money your family will potentially receive will decrease every year until the pay-out will amount to nothing by the term-end.
Why should I get decreasing-term life insurance?
The main reasons for decreasing life insurance
The main reason people choose decreasing-term life insurance, in particular, is to cover a specific debt or loan. For example, if you are paying off a mortgage, you might take out life insurance so that the pay-outs sync in with the fact that you will have less and less money to repay each year.
This can take a huge amount of stress off your family during a difficult time so that they will not have a mound of outstanding debts to worry about or a mortgage they can’t pay off after you pass away. This is the reason many people are asked to take out life insurance before they apply for a mortgage as it is certain this way, that the debt will be paid.
The benefits and the drawbacks
As with all types of life insurance, there are pros and cons to decreasing-term life insurance and it is worth thinking these over before you decide this is the plan for you.
The first benefit to consider is that your family will have less to worry about when it comes to debt and your outstanding mortgage when you pass away. This is one of the reasons it is a good idea to look into life insurance when you take out a mortgage and in fact, many mortgage lenders will insist on it.
Secondly, this is the most affordable type of term insurance, compared to increasing-term and level-term life insurance. If you are looking for an inexpensive cover that will also cover your family from debt in the future and protect your family home, then this is an option to consider.
This however leads us to the main drawback, the pay-out will not be as much as other types of term insurance. You should be aware that although the money you will get back will decrease as the term advances, the pay-outs will remain the same. This means at the end of the term, the money you pay in will be greater than the money your dependents may receive.
The difference between level-term and decreasing-term life insurance
You may often hear about level-term life insurance when you are looking at decreasing-term life insurance. This is because these are the two most popular types of life insurance. Depending on your own personal circumstances, one will be the best option for you. To help you decide which one, it is best to look at the differences between the two.
Both types of insurance are term life insurance and so they both only cover a specific period of time. If you die before or after this period, your beneficiaries will not receive anything. The premiums and the pay-out is where they differ.
Level-term life insurance has the same premiums and pay-out at the beginning and the end of the term. This means if you die at any point in this period, your family will receive the same pay-out. This will give the security of your loved ones so they know exactly the amount of pay-out they will receive.
Decreasing-term life insurance has a pay-out that will decrease gradually throughout the term. Many people choose this insurance to sync in with their mortgage and loans, so as the debt reduces over time, so does the pay-out.
Can I add critical illness cover to decreasing-term life insurance?
You can add critical illness cover to any type of life insurance. The premiums will be more expensive but it may be worth it if you depend on the income from your work to fund your daily living expenses.
Whereas life insurance will payout to your loved ones when you die, critical illness cover will pay out a tax-free cash sum to you personally if you are diagnosed with a disability, serious medical condition, or other terminal illness.
What happens if I stop paying my premiums?
As with all types of term life insurance, it is important to make sure you can pay your premiums for the whole term before you commit. If you stop paying at any point, the cover will come to an end. You will not receive any money back from what you have already put in and if you die, your family will not receive any payout.
What if I die after the term ends?
If you die after the term ends your family will not receive any payout from the policy. It is worth making sure you are happy with the length of the term when you first buy the cover, taking into account the exact things you want to protect. For example, making sure your children will be old enough to be self-sufficient by the time the term ends.
What kind of pay-out will my family get?
As with many types of term insurance, your family will receive the pay-out in the form of a tax-free lump sum. If you want your family to receive it as a regular income, every month, for example, you might want to look at another type of life insurance, such as family income benefit.