Decreasing term life insurance
There are several different types of life insurance plans out there. There are so many that it can often be hard to work out which one is the right one for you.
In This Guide:
- What is decreasing term life insurance?
- What is level term insurance?
- Should I get decreasing term insurance?
- Do you have death in service benefits through your work?
What is decreasing term life insurance?
Decreasing term life insurance helps the policy holder's dependents to pay off an outstanding debt that is going down over time. For this reason the length of the term is normally taken out to match the length of the loan.
This benefits of taking out a life insurance policy like this is the fact that it will allow the family to handle the financial burdens of the deceased. It often is the main reason that dependents can remain in the house after the policy holder has died.
It is important to be aware that decreasing term life insurance policies are not suitable for interest only mortgages. This is because this kind of a mortgage can only be paid off at the end of the mortgage term.
Another reason that you may choose this type of policy is that you simply do not feel that your dependents will require such a large payout as the years go by. For example if your children are grown up and financially independent, they will not need as much of a large payment.
What is level term insurance?
Level term insurance is different from decreasing term insurance because its payments do not decrease with time.
With decreasing term insurance, you normally base your decision on the amount to insure on the amount that you need to pay off. Decreasing term insurance is often cheaper than level term insurance. This is because the premiums that you pay drop regularly until the end of the term. This reduces the risk taken by the insurance company because they are less likely to pay out during the set term.
Should I get decreasing term insurance?
This type of insurance is normally taken out by people who are on a tighter budget than others. This is because payments on this type of insurance are normally a lot cheaper than level term insurance. Many people still choose level term insurance. The reason for this is that even if you are trying to pay off a debt with the insurance payout, you can do this with a level term insurance plan as well. Level term insurance has the benefit of remaining at the same amount throughout the term. This means that if your debt continues to fall, you will still have a payout that can be used for other purposes in the event of your death.
Do you have death in service benefits through your work?
One thing that people should consider before they decide to take out a life insurance policy is whether or not you have a death in service benefit included in your work contract. This benefit will pay out to your dependents in the case of your death during the time that you work for your employer.
A typical death in service benefit is valued at about four times the cost of your annual salary. This may seem like quite a lot but normally it would not go far when it comes to supporting your family. Therefore even if you do have this benefit, you should probably still think about getting a supplemental life insurance quote to see what extra cover you can get to ensure your family's financial security.
If you do have this benefit you should factor it in to your decision on how large a sum to insure. If you want to secure a sum ten times the amount of your annual salary and your benefit covers four times your salary, then perhaps you should insure a sum that covers six times the cost of your annual salary. By doing this you will pay a lot less for your insurance policy because the amount your insurer will pay out will be smaller than the amount it would have been.