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Decreasing term life insurance is constructed for those who have financial obligations and there is a risk that if something happens those debts may be not repaid. In such case this kind of insurance is a good decision because it usually is set to cover the outstanding balance of the debts. Decreasing term life insurance is provided by most life insurance companies.
Sometimes this type of insurance is also called mortgage protection insurance. Mortgage is usually one of the biggest financial obligations that an individual can have. Naturally it causes financial distress for family members because each month payments have to be made to the bank. If something happened to the breadwinners of the family, it would cause big problems to other family members. Thus, in order to protect themselves, family members should consider what possible precautions could be taken.
Let’s consider the situation where an individual wants to cover himself so it would be easier to pay off the mortgage for other family members in case the insured person dies. It is natural that mortgage burden is decreasing over time and there may be no need to have the same insurance cover in the first year as in the last ones. In this case a good option is to consider taking a decreasing term life insurance. As the name suggests, this type of insurance guarantees lower potential payoff as time passes by.
For example, a person took a mortgage that is worth £1,000,000. The mortgage has to be fully repaid after 10 years. The mortgage is repaid using linear schedule. This means that every year 10% of the initial amount of mortgage has to be repaid and this amount is equal to £100,000. The graph above presents how the cover of life insurance decreases over time. In the first year the cover is equal to £ 1,000,000 because none of the mortgage is being repaid. Every year the cover is decreased by £100,000 and after 10 years the cover is equal to zero and the insurance is terminated.
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First of all, decreasing term life insurance policies are among the cheapest ones available in the market. For example, "Aviva" offers this kind of policy for only £5 a month. It may be possible to find even lower quotes if some additional effort is put. However, the price difference will not be significant and, as a result, a couple of pounds saved every year may not be worth the effort.
Furthermore, as decreasing term life insurance is used to buy decreasing amount of cover, this type of protection has even smaller premiums compared to the ordinary term insurance. As a result, this offers an alternative for the person not to pay for the bigger amount of cover that is actually needed to feel financially safe and sound.
One more factor is that it is easy to purchase this kind of policy. As most life insurance providers offer the possibility to choose decreasing term life insurance from them, there are many different offers to select from. This gives the person a possibility to purchase the policy with good rates. Moreover, it is possible to choose the amount of cover higher than the mortgage. This is an option worth consideration for families where other additional living costs are sustained. Most common example is children education costs.
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However, this kind of insurance also has a lot of disadvantages. First of all, even though premiums are lower compared to most other life insurance types, they are distributed equally during time span of the policy. This causes a situation where in the beginning of the insurance, the individual pays for a high amount of cover, however, in later years he pays the premiums of the same size but for much lower sum of coverage.
It can be viewed that although in the first years of insurance contract it is beneficial to have this type of protection, in the later years it is not a financially wise decision. Even more, during the last couple of years the outstanding amount of coverage is not very high, it may seem to be a wise decision to terminate the contract and discontinue decreasing term life insurance policy.
One more disadvantage is that there are no cash-in opportunities, if the person has this insurance. It means that if nothing happened or the person wanted to terminate the insurance contract, he would not gain anything from paying the premiums.
Moreover, it is important to notice that not only death can cause the financial burden for other family members. Furthermore, nowadays term life insurance is much more popular as decreasing term life insurance is not a very convenient protection for other living costs. If the person has only this type of insurance, than it would be hard to get sufficient benefit in case something happened in the later years of the policy.
Usually decreasing term life insurance comes with terminal illness benefit. However, it must be noted that it is not the same as critical illness benefit. Terminal illness benefit is constructed that it pays out only if the person is diagnosed with a terminal illness and is expected to die in the next 12 months if there are at least 18 months left until the end of the policy.