What is decreasing term life insurance, and how does it work?

What is decreasing term life insurance, how does it work, and is it suitable for you?

We explain what you need to know, including the potential costs and pros and cons. 

What is decreasing life insurance and how does it work?

There are essentially two types of life insurance policies – whole life and term. 

Whole life insurance covers the whole of your life. It provides your beneficiaries with a payout upon your death, whenever that happens.  

Conversely, term life insurance policies only pay out if you die during your coverage period.

The average term length in the UK is 20 to 25 years. If your term ends before you die, your loved ones won’t be entitled to compensation under that policy. 

Decreasing life insurance, also known as decreasing term life insurance, falls into the latter category (alongside level and increasing options, which we'll explore later). 

When you opt for decreasing cover, the payout provided to your beneficiaries if you pass away lowers steadily in value over time. 

They’ll get the most at the start of your term and the least at the end of it. 

For example, if you have a 25-year-long policy, your loved ones will receive a more significant sum if you die four years in, compared to what they’ll receive if you die 24 years into the policy. 

What does decreasing term life insurance cover?

Decreasing cover is often recommended if you’re looking to protect your loved ones from a big financial commitment. It aims to provide the most coverage when it's most needed. 

For example, a decreasing policy would help your family if you were the primary earner in your household but died just four years into a 25-year mortgage. 

In terms of what decreasing life insurance will and won’t cover, your policy will decide this. 

The higher your coverage amount, the less likely the payout won’t stretch to additional costs like funeral expenses. 

You’ll typically find that decreasing life insurance won’t cover: 

• Anything but death or terminal illness (some providers also exclude terminal illness).
• Anything outside the policy’s term or amount.
• Death during the ‘waiting period’ before coverage kicks in.
• Death during the ‘suicide clause period’ if one applies.
• Death that occurs due to criminal activity, dangerous behaviour or lifestyle choices.
• Death that occurs abroad (depending on the specifics of the situation). 

How much does decreasing life insurance cost?

According to research from Direct Line in 2022, less than 40% of UK adults have a life insurance policy. 

Much of this comes down to cost and how affordable this sort of financial protection appears. 

In reality, there’s a big difference between the premiums you face if you take out a whole life insurance policy compared to taking out a 20-year decreasing life insurance policy. 

According to Reassured, the difference is around £178 per month versus £38 per month for decreasing life insurance.  

If you can find a guaranteed, fixed premium at a young age, you can cover your future for less than you might expect, especially if you’re healthy, physically fit and don’t smoke or have a dangerous profession or hobbies. 

Level term vs decreasing term life insurance

If whole life insurance is outside your budget, you might wonder about other term insurance options.  

Level term cover guarantees your beneficiaries the same payout amount throughout your policy. 

Increasing term cover is essentially level cover that will grow in value annually, either according to inflation or an agreed flat rate. 

Both options have higher premiums than decreasing cover but may better suit your needs and provide more peace of mind. 

You might find that income protection or critical illness insurance can ease any concerns about the level of support decreasing cover can provide. 

Learn more: income protection vs critical illness, what's the difference?

The pros and cons of decreasing cover

There are many advantages and disadvantages to decreasing term life insurance, which you should carefully consider before taking out a policy.  

The benefits of decreasing term life insurance

• It’s usually the cheapest and most accessible option.
• The policy pays out the highest amount if you die earlier than you expect, helping to protect your family if the worst happens.
• It tends to reduce in line with debt over time, meaning that if your beneficiaries receive less money, they also need a lower amount to clear the debt.  

The drawbacks of decreasing term life insurance

• It offers the lowest overall coverage, especially in the later years of a policy.
• It may not cover anything but your mortgage, leaving your loved ones at risk of covering to other outstanding debt and funeral costs.
• The policy doesn’t have any value after your term comes to an end (this also applies other types of term life insurance)

There’s a lot to consider regarding financial protection for you and your family, so it's worth considering the best ways to support your loved ones if the worst happens.  

If you’re struggling to find the best insurance policy for your needs, you can find an insurance broker via Unbiased.

Learn more: what is an insurance broker and what do they do?

Can I combine a decreasing life insurance policy with critical illness cover?

You have the option to combine critical illness cover with decreasing term life insurance, or you can choose to have them as separate policies.

Choosing more than one insurance policy can provide added protection for different situations.

Critical Illness cover is particularly valuable, offering financial assistance if you're diagnosed with a critical illness. This support can help you and your family settle outstanding debts like a mortgage.

Opting for combined cover means you take out both policies together, with just one monthly premium to pay.

Keep in mind that the cost of your premium will increase to reflect the extended coverage.

However, it's essential to note that combined cover typically pays out only once.

If you make a claim for Critical Illness, your life insurance coverage will no longer be active.

Alternatively, you can choose to take out both policies independently.

This means paying for two policies, but you'll have coverage for both critical illness and life insurance.

Should I consider a joint policy?

A joint policy might be a smart choice. It's cost-effective and ensures that the mortgage gets paid off once, no matter which partner passes away first.

Joint policies are often more affordable than two separate ones.

This way, the reamining partner is left with enough funds to clear the mortgage.

After that, they can take out an individual life insurance policy based on their financial needs.