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Decreasing term life insurance

A decreasing term life insurance policy is arranged to provide a decreasing sum of cover over a specific period of time, often in line with a capital repayment mortgage.

This is because the balance of the loan will reduce over time so decreasing term insurance provides a more cost effective option than level term insurance if you are solely seeking a guarantee that your mortgage will be repaid.

Decreasing term insurance can also be used in tax planning where a tax liability is known to decrease over time.

And it may be used in conjunction with an interest only mortgage that has an investment to repay the balance outstanding.

However there is a risk that a difference between the repayment vehicle arranged and the remaining sum insured could leave surviving family members with a shortfall.

For capital repayment mortgages most decreasing term life insurance policies will guarantee to repay the mortgage as long it stays below a fixed interest rate, which is often 10%.

Decreasing term life insurance - Typical Cover Options

Decreasing term life insurance will usually be available as either sole or joint cover, and you may arrange this type of life insurance for anyone in whom you have an insurable interest be that your spouse, business partner or employee for example.

You can choose the level of benefit you require or base the benefit around the monthly payment you are willing to make.

The term is set when arranging the policy, and if there is not a definite term in mind a renewable term insurance may be more suitable.

Indexation is an option that allows you to arrange for the sum insured to increase in line with inflation either based on indicators such as the retail prices index or by a fixed percentage.

This will have the benefit of ensuring that your cover does not diminish in value relative to inflation over time.

Waiver or premium provides the option to stop paying premiums in the event of a period of ill health after a specific amount of time for example 6 months.

This could be very useful for example in the case of a critical illness where you may be unable to work for many years prior to the policy paying its benefit in the event of death.

There would also usually be the option to include critical illness cover on the policy and many insurers will also offer the option of income protection to repay mortgage costs etc in the event of long term ill health.

It should be considered however whether redundancy cover may be required as this may mean a specific accident sickness & unemployment insurance policy may be more suitable.

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