Life insurance can seem complicated, with a variety of policies and terms to navigate. One type of policy that’s worth understanding is decreasing term life insurance. Unlike some other forms of life insurance, the coverage amount of a decreasing term policy reduces over time, making it a unique option with specific applications.
In this article, we’ll break down what decreasing term life insurance is, how it works and how it differs from other types of term life insurance, such as level term. We’ll also explore who might find this type of policy most beneficial, helping you determine if it’s the right fit for your needs. Keep reading to learn more.
What is Decreasing Term Life Insurance?
Decreasing Term Assurance (DTA), also referred to as mortgage life insurance, is a type of term life insurance, which means it only offers cover for a specified period of time – aka term. The average term length is typically between 20-25 years, however there is often flexibility in the length of cover you can take out, with additional health and lifestyle factors that may be taken into account when determining this.
The way decreasing term life insurance works, then, is that your assured cash sum decreases over time. This means that, should you die during the period of cover, how much payout your beneficiaries receive is dependent on when you die within the duration of your cover.
For example, if your policy lasts for 25 years and you were to die in year four, then your beneficiaries would receive a much larger sum than if you were to die in year 24.
As for the monthly premiums you pay throughout the policy, these tend to remain the same throughout, however are often lower overall compared to other insurance policy premiums, such as level term life cover.
Who & What Does DTA Cover?
In terms of who is eligible for a Decreasing Term policy, this may differ between providers. Typically though, the eligibility criteria for such a policy is as follows:
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The maximum policy term is 50 years
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The minimum age you can take out a policy is 18 years old
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The maximum age you can take out a policy is the day before your 70th birthday
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The latest your policy term can end is the day before your 90th birthday
As for what such a policy covers, here at Assura Protect, the maximum amount of cover that can be purchased on our Dividend Term Life Insurance policies (including our Decreasing Term Assurance policy) is up to a value of £1,000,000. However, the specific amount of cover you can take out may vary based on factors such as your age, health and our underwriting criteria.
Regardless of how much cover you receive, all benefit payments are tax free and can be used for any purpose, including:
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Paying off outstanding mortgages or loans
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Ensuring a continued standard of living for your dependents
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Covering funeral costs
As for when you will be covered in the event of your death, it’s important to note that there will likely be some stipulations specified in your policy. For example, it’s often standard for decreasing life to not cover:
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Anything but death or terminal illness
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Anything outside the policy’s term
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Death during the ‘waiting period’ before coverage officially begins
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Death during the ‘suicide clause period’ (if one applies)
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Death that occurs due to criminal activity, dangerous behaviour or dangerous lifestyle choices
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Death that occurs abroad (depending on the situation and specific circumstances)
How Does It Differ from Level Term Insurance?
Level term life insurance is also a type of term life insurance, covering you for a determined period of time. The main difference between Level Term Assurance (LTA) and DTA, however, is that with level term insurance, your cover remains the same throughout the duration of your policy, rather than decreasing over time.
This means that, regardless of when you die during the duration of your policy cover, your beneficiaries will receive the same assured cash sum. Although, because of this, the premiums you must cover are likely to be higher in comparison to DTA policies.
With that said, you can choose the level of cover you wish to have and for how long, which can impact the premiums you pay. For example, if you wish to only be covered for £50,000, then your premiums will be less than if you wished to be covered for £100,000.
Who is DTA Best-Suited To?
Whilst a life insurance payout can be used towards any purpose, taking out a decreasing term life insurance policy is often best for those who have a repayment mortgage. A repayment mortgage is the typical type of mortgage that most homeowners pay back; this is where you pay back both the capital (the total amount you loaned) and the interest on the original amount you loaned.
The reason why decreasing term insurance policies are especially well suited to those with repayment mortgages is because as your level of coverage decreases, this tends to align with the decrease of your outstanding mortgage balance as you make repayments. As such, most people tend to adjust their level of cover to match the duration of their mortgage, ensuring that the payout will settle the remaining balance upon death.
If you don’t have a repayment mortgage, but do have other debts that become smaller over time, then a decreasing term life policy may still be suitable for you. For example, if you currently pay back an auto loan or small personal loan, then the payout from a decreasing term policy could also be used towards covering the cost of these. Ultimately, this type of loan helps to protect your loved ones against your outstanding debts.
It’s also important to consider the financial position your dependents will likely be in in the event of your death before taking out a decreasing term life policy. For example, if your family is currently dependent on your income and likely still will be in the future, then a DTA may not be the best option for them financially in the long run, as the payout may not be enough to cover their living needs – especially if you die towards the end of the policy. Instead, you may be better opting for either a level term or whole life policy.
Alternatively, if your dependents have their own income or will become self-sufficient in upcoming years, then a decreasing term policy is more likely to be sufficient to cover any outstanding debts without impacting your family’s financial comfort.
Term Life Insurance with Assura Protect
If you’re looking for a flexible term policy with reasonable life insurance premiums and additional benefits, then look to us here at Assura Protect.
Our Assura Dividend Term Life policies include fixed premiums for the entire policy term, Guaranteed Insurability Option and full Annabel Benefits & Rewards as standard, with Dual Life Cover available as an additional policy option.
To learn more about the level of cover you could be eligible for and to receive a policy quote, then don’t hesitate to get in touch with us. Alternatively, you can use our Quick Quote service online today.