Decreasing Life Insurance

Frequently Asked Decreasing Life Insurance Questions

• What's the Difference Between Level and Decreasing Life Insurance?

  The difference between Level Life Insurance and Decreasing Term Insurance is how the benefit is treated over time.

  Decreasing Life Cover as the name suggests, sees the benefit fall over time, reaching zero by the end of the policy’s term. This makes it particularly suitable for covering a straightforward repayment mortgage, where the outstanding debt also falls to zero by the end of the mortgage.

  Make sure the interest rate assumed by your insurer / the policy doesn’t see your cover decrease faster than your mortgage, which could potentially leave you with a protection shortfall.

  Level Life Insurance, on the other hand, sees the benefit remain fixed over time. This means that the amount you’ll receive if you die within the first year of the policy is the same as if you died in the last year of the policy.

  A level policy is therefore more suited to covering an interest-only mortgage, where the outstanding capital balance doesn’t fall over time. It’s also well-suited to providing a constant level of family protection throughout the policy term.

• Should I Add Critical Illness Cover?

  Most Life Insurance policies offer you the option to include Critical Illness Insurance.

  This means that the policy would not only pay out if you were to die, but also if you were to become critically ill as defined by the policy, i.e. developing a condition listed in the policy terms.

  The main three illnesses are cancer, heart attacks and strokes, but Critical Illness Insurance tends to cover around 40 illnesses in total. However, there are policies which cover as few as 10 and policies that cover in excess of 100 illnesses, so it pays to make sure you read the policy carefully.

  Adding Critical Illness Cover to your Decreasing Term Insurance policy will increase your premiums because there is a much greater risk of you suffering a serious illness than there is of you dying.

  Your Critical Illness Cover will decline alongside your Life Insurance over the term of the policy, so you’ll get a lower payout in the later years of the policy term if you were to become critically ill.

  Consider Income Protection

  If there is a real need for protection against ill-health, we generally recommend you consider an alternative product called Income Protection.  It pays out a monthly income should you be unable to undertake your own occupation for any illness or injury rather than limiting the cover to a specific list of serious illnesses.

  The best Income Protection policies will pay out over the long-term, so until your retirement age, providing you with a regular income each month rather than a single lump sum. This prevents any issues where the lump sum is used up by repaying the mortgage and doesn’t leave you anything to live on, or it simply is depleted before you’re well enough to return to work.

• What is Terminal Illness Cover?

  Terminal Illness Insurance is different from Critical Illness Cover. Critical Illness Insurance is an optional add-on to Life Insurance designed to cover you if you become critically (and not necessarily terminally) ill.

  Terminal Illness Cover, on the other hand, is built in to most Life Insurance policies as standard. You don’t pay anything extra for having it in place. Essentially, it just means that the policy will pay out early if you are diagnosed with a terminal illness and your life expectancy is 12 months or less.

• Single or Joint Policy?

  Of all the Life Insurance products, Decreasing Life Insurance is the perhaps most likely to be taken out as a Joint Life Insurance policy – many couples use it to protect a joint repayment mortgage.

  However, whether it’s best to take out Decreasing Term Insurance on a joint basis will depend on what you want to protect.

  This is because most joint policies are ‘joint life, first death’, which means that the policy will only pay out upon the death of the first person.

  Although this type of policy can make sense for a couple who only want to protect their mortgage, if you want to do more with the payout than just pay off the mortgage, such as ensure children are taken care of, it may be more cost-effective to consider two individual policies.

  Having two individual policies usually only comes at minimal extra cost to having a joint policy and effectively allows you to secure twice the payout, one on each death.

• Should I Write the Policy into Trust?

  When setting up a new Life Insurance policy, many people fall at the last hurdle and forget to write their policy into trust. Writing a policy into trust will protect your insurance benefit from inheritance tax and ensure that the full amount goes to your loved ones.

  If you are intending for your Life Insurance benefit to go to your children, then writing your policy in trust is a very important step to take when you apply. However, you may not always need to write your policy into trust.

  If you are using your Life Insurance policy to cover your mortgage, there may be less benefit to writing your policy into trust. This is because the insurance payout that is added to your estate would be used to pay off your mortgage debt, effectively ‘cancelling out’ any inheritance tax liability on the funds.