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What is decreasing term life insurance?

Jenni Hill
Last Updated 4 April 2024

Life insurance can offer your family financial protection if you pass away, but which type of insurance should you choose? Let’s take a look at how decreasing term life insurance works and whether it’s worth it.

In this guide

What does decreasing term life insurance mean?

Decreasing term life insurance is a type of life insurance policy where the payout gets smaller over time. So, if you pass away within the first few years of taking out the policy, your loved ones will receive a much bigger payout than if you pass away during the last few years.

How does decreasing term life insurance work?

Decreasing term life insurance works by giving your beneficiaries a payout if you pass away during the policy term. Your monthly premiums will stay the same throughout your policy, but unlike a level term policy, the potential payout will get smaller over time. 

Decreasing term life insurance is often called ‘mortgage’ life insurance because many people choose this type of cover when taking out a mortgage

It’s usually more affordable than level term life insurance or whole life cover, but read the terms and conditions before making a commitment. Some policies include an interest-rate cap, which means you’ll only be covered up to a certain rate of interest. If the interest rate on your mortgage exceeds the cap, the payout might not cover the outstanding debt. 

You can often add critical illness cover to your life insurance policy. This will increase your monthly premiums, but it may work out cheaper than taking out the two policies separately. 

If you’re married or you have a long-term partner, a joint policy can be cheaper than a single one. However after the first death, a payout will be made and the policy will end. If the surviving partner wants cover to continue, they’ll need to take out a new life insurance policy. 
Learn more: Can I have more than one life insurance policy?

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Why would you get decreasing term life insurance?

You may want to get decreasing term life insurance if you have a repayment mortgage. As your outstanding mortgage balance gets smaller over time, so too will your life insurance payout. 

It’s up to you how much life cover you need. Your outstanding mortgage balance can serve as a guide, but your life insurance policy won’t be legally connected to your mortgage or any other outstanding debts. This means your beneficiaries could choose to keep the mortgage and use the payout for other expenses instead.

Your insurance provider won’t be notified if you overpay your mortgage or become debt-free sooner than planned. If your beneficiaries make a valid claim during your policy term, they’ll receive a payout even if there is no longer a mortgage in place.

Learn more: Guide to life insurance for mums

What happens to my life insurance if I pass away after my mortgage is paid off?

If you pass away after your mortgage is paid off and your decreasing term policy has ended, your loved ones won’t receive a payout. You can avoid this by taking out a new life insurance policy when your cover ends, but since your premiums will be based on your age and health, your new payments may be much higher than before. 

If you outlive your mortgage and insurance policy, it can be tempting to add up how much you spent on premiums and assume it was a waste of money. Try to remember that outliving your life insurance policy is ultimately the goal. You could even throw a party to celebrate! 

If you want your loved ones to receive a guaranteed payout, no matter when you pass away, you may be better suited to whole life assurance. Whole-of-life cover is usually more expensive than term life insurance, but you’ll have peace of mind that your loved ones will definitely get a payout. Whole-of-life cover can have inheritance tax benefits too if it’s written into a trust, but speak to a financial adviser before choosing this option.

Learn more: Do beneficiaries pay taxes on life insurance?

Is decreasing term insurance worth it?

Decreasing term life insurance can certainly be worth it, but it all depends on your personal circumstances. If you have a mortgage or other types of debt that’ll take several years to pay off, decreasing life insurance will protect your home and help your loved ones avoid financial difficulties.

This type of life insurance policy can be more affordable than level term policies, but there are potential downsides too. If you’d like your loved ones to receive a very large life insurance payout that not only pays off outstanding loans, but also covers bills, life expenses and even holidays, you may be better suited to a level term policy. A level term policy will cost you more each month, but the payout can offer your loved ones more financial security. 

Choosing a life insurance policy can be tough. You’ll probably want your loved ones to receive the biggest payout possible, but you need to consider just how affordable your monthly premiums will be. Overstretching yourself will only make it harder to keep on top of your payments, particularly if you lose your job or you have a financial emergency. 

If you miss a payment, your insurance company may terminate your policy and you won’t get any of the money you’ve already paid back. So try to find a healthy balance between what you want to leave for your loved ones and what you can afford. 

You might also want to consider taking out a life insurance policy with a waiver of premium. A waiver of premium is a type of add-on cover that can be added to your policy so that if you’re ever unable to work due to a serious illness or injury, your policy will stay active. Keep in mind though that a waiver of premium can’t be added to existing life insurance, so if you’d like this extra layer of protection, you’ll need to request it when taking out a new policy.

How do I pick the right policy for me?

Choosing the right life insurance can be overwhelming. Get a quote from our team of insurance specialists today and we’ll compare life insurance policies from a choice of insurers until we find the right one for you.

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