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Decreasing Term Life Insurance

Life cover designed to take care of outstanding debts.

Decreasing term life insurance is a specialised product usually used to cover a mortgage or indeed any other type of debt. It decreases because as you pay off the debt, you need less life cover to pay it off if you were to die. These policies prevent you passing outstanding debts on to your descendants.

To understand decreasing term life insurance, you first need to understand what a term is. The term of a life policy is the length of time that you are covered for. A whole life policy covers you indefinitely from the moment you take the policy out. Since it’s a dead cert you’re going to die someday, these are more expensive than term assurance policies which only offer you cover for a specific length of time, e.g. ten years. That’s because, depending on your age and health, there’s a good chance you won’t die in those ten years- in which case the insurer has simply taken your cash.

As you can see, a term policy, and its derivative the decreasing term life insurance policy, is basically a gamble. You get a lower rate than a whole life policy because in many cases (often the majority), there is no need to pay out. Term policies are often used to cover the event of death relative to specific expenses, for example covering inheritance tax, your children’s education etc.

Decreasing term life insurance is used to cover a very specific type of expense; namely a debt (and usually a mortgage). If you took out a policy today, across ten years, the amount of your mortgage would progressively diminish across those ten years. So if you died after nine years, the policy would have to deliver less money to cover the nominated expense; than if you died after only one year.

Quite simply, decreasing term life insurance is designed to do just that: you will again pay a lower premium because the amount you expect to get back in the event of your death is decreasing all the time.