Decreasing Life Cover

Term Assurance: the Ins and Outs of a Decreasing Life Cover

A decreasing life cover is a specialized product that has a lump sum payout that�s reduced by a fixed amount year after year until the maturity period, when the amount is back to nil. This form of cover is often used for mortgages or other loans where the amount owed is reduced on a yearly basis as partial payments are made. These policies are also taken out to prevent passing outstanding debts on to your family in the event you meet your untimely death. Like all forms of term life cover, there is no investment element with this one.

Premiums start off as cheap, and gets even cheaper

If you took out a 10-year decreasing life cover policy today, the amount of your mortgage would progressively decrease across ten years. So if you died only after a year, the policy would have to provide a payout that is significantly higher than that if you died after nine years just to cover the nominated expense. Quite simply, a decreasing term insurance is designed to do just that: you will pay very cheap premiums, and it gets cheaper as the years go by, because the amount you expect to receive if you died is decreasing all the time.

What is it used for?

This type of insurance cover is used to cover a very specific kind of expense, namely a mortgage or formal debt. Established creditors such as banks, financiers and investment houses often require collateral to safeguard their outstanding loans, and a decreasing life cover is usually their collateral of choice. Because it is entirely legitimate and easier to liquidate compared to assets, creditors will almost always automatically accept a decreasing life cover as your collateral.

Unless it�s for a loan protection, don�t take out one

To understand the cons of decreasing life cover, you first need to know what a term is. The term of a life insurance policy refers to the length of time you are covered for. A whole life policy covers you indefinitely from the moment you take out a policy. Since it�s basically a guaranteed payout because you�re going to pass away someday, these policies are more expensive than term life policies which only offer you a coverage for a specific period, usually with durations of 5, 10, 20, 30 and 40 years. That�s because there�s a good chance you won�t die within that term regardless of your age, health and occupation, in which case the insurer has basically taken your money.

A decreasing life cover, therefore, is ultimately a gamble. Indeed you get a lower rate than a whole life policy, but that�s because in many cases there is no need to pay out on the part of the insurer. GP