Decreasing Term Assurance

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If you have a capital repayment mortgage it is very likely that you have this type of policy. It is more generally known as a Mortgage Protection Policy. You can call a policy what you like, it is what it achieves that is the important matter.  

To explain in further detail, let me remind you that with a capital repayment mortgage, you are reducing the amount of your balance outstanding throughout the term of your mortgage e.g if you had a £100,000 mortgage over 25 years, in year 15 you would owe approximately £50,000 (Source Trigold) still. After 20 years your balance would be in the region of  £25,000 (Source Trigold).
A decreasing term assurance policy is designed to track the amount that you owe at any one time.
Therefore the amount that is paid in the event of a death or a critical illness, if included on the policy decreases each year the plan is in force. It has to be said that this is not an exact science and it is very likely that should a policy need to be claimed on, the amount that is paid will not match exactly what is outstanding on your mortgage, it could pay more or it may pay less than what is required.

HOWEVER … many life companies do offer a guarantee that providing you do not alter your mortgage in anyway i.e increase the loan, fall in arrears or extend the term of your mortgage, they will pay your mortgage in full if a valid claim is made, irrespective of the amount of life cover left on the plan during the policy term.

Can a Decreasing Term assurance be used for other purposes?

Yes it can. You may have loans other than your mortgage, e.g credit cards, personal loans, further advances, HP agreements, even loans you have arranged with your family.

A decreasing term term assurance can have a term from 5 years onwards normally up to age 75. Because of the nature of the plan it is a cheaper premium than a level term assurance.   

Never forget that any loans outstanding at the time of death still need to be settled and it is the responsibility of your executor (assuming you have made a will) to pay any debts before your estate can be distributed.

Example rates for Decreasing Term Assurance

  • Plan Benefit £150,000
  • Critical illness including life cover
  • Term 25 years
  • Age next birthday 31
  • Male or Female
  • Non smoker £24.67 per month
  • Smoker £32.85 per month

As above except

  • Age next birthday 26
  • Non smoker £18.48 per month
  • Smoker £22.95 per month

All rates correct as at 25 July 2013

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