Will your loved ones be able to stay in the family home, even during difficult times?
Buying a home is a milestone for many, symbolising stability, independence, and financial success. Most home buyers use a repayment mortgage to achieve this dream, which involves monthly payments that reduce both the amount borrowed, called the capital, and the interest owed.
However, while planning for a bright future in our new homes, it’s essential to consider the “what ifs.” How would your loved ones manage financially with outstanding mortgage payments if the worst were to occur? This is where decreasing term life assurance becomes invaluable.
Decreasing term life assurance is specifically designed for homeowners. It offers a safety net tailored to match the way a repayment mortgage decreases over time. With this type of policy in place, you can rest assured that your family won’t face the additional burden of mortgage debt should the unexpected occur.
Understanding how decreasing term life assurance works
At its core, decreasing term life insurance is a policy that steadily reduces its payout amount over the policy’s term. The decline in coverage mirrors the decreasing balance of your repayment mortgage. Essentially, the policy guarantees that whatever the remaining mortgage amount is, there will be sufficient coverage to pay it off.
Here’s an example. Imagine you have a £250,000 mortgage spread over 30 years. With a repayment mortgage, you gradually pay down the capital borrowed along with the interest, resulting in a decreasing outstanding balance each year. A decreasing term life assurance policy taken alongside this mortgage would adjust its payout amount according to the outstanding balance. If tragedy strikes 20 years into your mortgage term, the policy would pay out the amount owed at that time, ensuring your home remains secure and debt-free for your family.
Benefits of choosing decreasing term life assurance
One of the main advantages of decreasing term life assurance is its cost-effectiveness. As the coverage diminishes over time, insurers perceive the risk to be lower, leading to more affordable premiums compared to level term life insurance, where the payout remains consistent throughout the policy term. For families operating on a budget, this reduced cost makes life assurance significantly more accessible.
Consider the story of James and Ellie, who secured a 25-year repayment mortgage for their first home. With a tight monthly budget, the couple opted for decreasing term life assurance. By selecting this option, they ensured that their mortgage would be paid off if either of them were no longer around, without having to dedicate valuable resources to higher insurance premiums.
Factors that affect policy premiums
The premiums for decreasing term life insurance are influenced by several factors. Your age, health, and lifestyle choices, such as smoking or exercise habits, play a significant role. The amount of coverage needed and the length of the policy term also affect the cost. For instance, a young non-smoker applying for a 20-year policy will generally pay less than an older applicant with health issues.
An additional decision to make is whether to choose a single or joint policy. For couples sharing mortgage responsibilities, a joint policy may seem like an attractive option. However, it’s crucial to understand that such policies typically pay out only once, usually upon the first death, meaning the surviving partner would be left without additional life cover. Some people prefer individual policies to ensure continued coverage for both parties.
Considerations when choosing a policy
When selecting decreasing term life assurance, careful consideration is crucial. For instance, consider what happens at the end of the policy term. By the time your mortgage is paid off, the life assurance policy will also terminate, meaning there will be no lump sum payout for your dependents. If you desire ongoing financial protection, you might need an additional policy alongside it.
Another point to consider is your family’s broader financial needs. While covering the mortgage is essential, will your loved ones handle ongoing expenses such as utility bills, school fees, or other living costs without your income? Combining decreasing term life insurance with a separate level term policy, or income protection insurance, may provide a more comprehensive safety net.
Peace of mind made affordable
For many homeowners, the main appeal of decreasing term life assurance is its ability to offer focused financial security at an affordable cost. It safeguards what is often a family’s most valuable asset – their home. With a mortgage-specific solution, you’re not paying for more coverage than necessary, which helps keep premiums reasonable.
This policy ensures that your loved ones can remain in the family home, even during difficult times. That stability can make a significant difference as they adjust to life without you, providing a sense of security and continuity when they need it most.
