One of the most popular forms of life insurance purchased today is term life insurance.
In most cases, premiums are affordable, and the lump sum payout to beneficiaries is very attractive.
Like other forms of life insurance, riders and variations on the policy are available.
One such variation of standard term life insurance is called decreasing term life, which offers a decreased premium over the policy’s term.
Benefits of Decreasing Term Life Insurance Over Whole Life
Decreasing term life insurance often appeals to those seeking to cover debts, such as mortgages.
Unlike whole life insurance, it provides coverage only during the years it’s needed most, typically when the principal debt is highest.
While whole life policies may serve as investment vehicles, decreasing term policies excel in terms of affordability and purpose-driven protection.
The focus remains on lowering premiums as the risk or debt diminishes over time.
Click To Compare QuotesPremiums for a policy such as this are set based on the standard parameters of:
• Current age
• Term of policy
• Cover desired
• Current health
• Gender
• Smoking status
For those in older age groups, term insurance policies are often more affordable than whole-of-life policies, but older individuals will still pay a higher premium than someone in the prime of their life.
In addition, if the individual is in poorer health, premiums would be higher.
Common Riders in Decreasing Term Life Insurance
Many decreasing term policies offer riders that can enhance basic coverage. For instance, a major illness rider offers a payout upon diagnosis of a specified illness, supporting treatment costs or loss of income.
Another common add-on is the waiver of premium rider, which maintains the policy’s validity if the policyholder becomes unable to work.
These options provide extra layers of security without needing separate policies.
Why Would I Want a Decreasing Term Life Insurance Policy?
Many individuals secure life insurance to help their loved ones financially survive their passing. For those who expect to be on a limited budget as they get older, a decreasing term life insurance policy is very attractive.
Although the benefits decrease as the policy reaches its final term date, so do the premiums.
The main reason someone would choose a policy such as this would be that the decreasing payout is set to mimic the remainder of the principal on the home’s mortgage.
Click To Compare QuotesIn this particular case, the beneficiary could use the payout to pay off the remainder of the home and own it outright, leaving them with no mortgage payment as they start their journey without their partner.
Tax Implications of Life Insurance Payouts
Generally, life insurance payouts are received free from income tax by beneficiaries in the UK.
This tax-free benefit allows the total amount to be utilised for large debts, such as a mortgage, ensuring the policy’s intended purpose is fully realised.
Only in specific situations, such as certain trusts, might there be implications to consider, making it wise to seek professional advice.
As briefly mentioned, the lower premium is also very attractive. Budgets can become very tight as one gets older, and a high insurance premium may become unaffordable.
Since the benefit payout decreases over time, the premium will also go down. As income becomes increasingly limited with old age, the premium decrease allows the insured to continue paying for the insurance without dramatically affecting the household budget.
How Do I Pick the Right Policy?
The first concern of any insurance policy is how much coverage is needed.
However, unlike a standard policy, the insured needs to ensure they have sufficient coverage for the present rather than focusing on how future inflation may affect the coverage.
While factors such as this are still important, the immediate payout will be the biggest and should be carefully considered.
In addition to the mortgage situation mentioned above, other contributing factors to the amount of coverage at the start would include credit card debt, personal loans, automobile payments, and any additional educational costs being paid.
Click To Compare QuotesIn most cases, the debt load will decrease over time, and so will the need to compensate for these financial needs through insurance.
When deciding on the term of the coverage, the insured will need to sit down and budget everything out over the expected course of repayment. For instance, how many years are remaining on the mortgage?
When will the car be paid off? If there is no further credit card spending, how much longer will it take to pay the cards off completely?
Is there a retirement account or pension fund that will become accessible at some point in the future?
Once all these questions are answered and the complex numbers for the financial needs are entered, it’s time to discuss policies with one of our insurance experts.
They can assist in finding the proper coverage and policies for the proper term of cover.
Common Mistakes to Avoid When Choosing a Policy
A frequent mistake when selecting a decreasing term policy is not aligning the term length with the debt payoff schedule, such as it ending before a mortgage is fully paid.
Another pitfall is underinsuring by not fully accounting for the initial coverage needs or possible future expenses.
Ensuring all debts and financial future plans are covered helps prevent these issues.
What Are the Pros and Cons of Decreasing Term Life Insurance?
Pros
• Term life insurance policies are cheaper
• Premiums will decrease over time to reflect possible declining bills and income
• Benefits are received in one lump sum
• Riders can be added, such as critical care, to add value to the policy
Cons
• The insured can possibly outlive the term of the policy, resulting in no benefits payout
• While premiums do increase, so does the payout. If unexpected bills or costs arise late in the policy term, the declining payout may not meet financial needs.
• Missing a premium payment will result in voiding the policy (common for any insurance)
If you think a decreasing term life insurance policy is for you, call or use our online contact form to discuss your needs with a Claybrooke insurance specialist.
You can also use our comparison tool to start the process and then discuss your specific needs with one of our specialists after reviewing the policies that fit within your budget.
Market Trends in Decreasing Term Life Insurance
Recently, there has been growing interest in decreasing term insurance, partly due to increased homeownership and financing.
Competitive interest rates have further supported this trend, making these policies a sensible choice for first-time homeowners.
Insurers are enhancing their products to address shifting consumer needs, leading to more flexible and customisable offerings.
We look forward to hearing from you and helping you find the best life insurance coverage to offer peace of mind to both you and your family.