Without proper life insurance, your family could face losing their home if you die unexpectedly.
The mortgage payments don’t stop, and neither do the other household expenses. Yet choosing the wrong type of insurance could mean paying more than necessary or having inadequate cover when they need it most.
Decreasing life insurance offers targeted protection that matches your mortgage debt, potentially saving money while ensuring your family can stay in their home.
Rather than paying for more cover than you need, this approach aligns your insurance with how much you owe on a repayment mortgage.
Read on to discover whether this type of insurance suits your circumstances and how it compares to other options available.
Decreasing life insurance basics
Let’s start with what decreasing mortgage life insurance actually means.
First off, it is a policy that is designed to protect a standard repayment mortgage against the death of a borrower.
It’s life insurance where the lump sum that’s paid out to your beneficiaries reduces each year, following a predetermined mortgage repayment schedule.
The clue is in the name – the sum assured decreases as the years pass.
This might sound strange at first.
Why would you want insurance that pays out less as time goes on?
The answer lies in how a repayment mortgage works. When you buy a home with a £500,000 mortgage, you owe the full amount. After five years of payments, you might owe £420,000. After ten years, perhaps £320,000.
Your decreasing mortgage life insurance broadly follows this same pattern. So if you die in year ten, they receive roughly £320,000 – still enough to clear the remaining debt.
How premiums work
The key thing to understand is that your monthly premiums are fixed and stay the same throughout the policy term.
You’re not paying less each year even though the sum assured reduces.
Don’t confuse this with ‘mortgage payment protection insurance’, which covers your monthly payments if you can’t work due to sickness or accident.
Decreasing life insurance pays out a lump sum when you die, giving your family the money to pay off the mortgage completely.
Some insurers call this “decreasing term assurance” – it’s the same product with a slightly different name. The “term” refers to the length of time the policy runs, which usually matches your mortgage term.
How the reducing payout works
The reduction in cover doesn’t happen randomly, it closely follows how the balance on a repayment mortgage falls each year.
Most policies reduce the sum assured each year on the policy anniversary, though some adjust monthly.
When your circumstances change
The yearly reduction in cover assumes you’re making standard repayment mortgage payments.
If you overpay your mortgage significantly, your actual debt will fall faster than your insurance cover. This creates a potential gap, though it’s usually not enormous.
What happens if you switch to an interest-only mortgage partway through?
Your mortgage balance stops reducing, but your insurance cover continues to decrease. This mismatch will leave your family with insufficient cover to clear the mortgage.
Some policies offer flexibility here.
You might be able to convert to level term insurance or adjust the reduction rate if your circumstances change substantially. However, this usually requires underwriting again, and your premiums will increase.
Reducing payout
If you die early in the policy term, your family receives close to the full sum assured. If you die in the final few years, the payout will be much smaller.
This is by design, as in the latter years your mortgage balance will have significantly reduced as well.
Remember, the primary aim is for the mortgage to be paid off should you die.
Get insurance advice
Let Unbiased match you with an independent life insurance expert. Getting started is easy, fast and free.
Who should consider decreasing life insurance
We will begin by saying that a qualified financial adviser is the best person to advise you on your insurance requirements.
However, this type of insurance generally works best for specific groups of people in particular circumstances. You’re likely a good candidate if you’re a younger homeowner with a repayment mortgage and limited budget for insurance premiums.
First-time buyers often find decreasing life insurance appealing.
You’ve just stretched your finances to buy a home, and your main financial worry is the mortgage debt. Your children are young (or you’re planning to have them), and your primary concern is ensuring they keep the family home if something happens to you.
Single parents frequently choose this option too.
If you’re raising children alone and your mortgage represents your biggest financial obligation, decreasing cover can provide essential protection without breaking your budget. Your kids need the security of staying in their home, and this insurance can offer that.
Young couples where one partner earns significantly more than the other often benefit from this approach.
If the higher earner dies, the surviving partner needs the mortgage cleared to maintain their lifestyle and stay in the property.
When it might not suit you
However, this type of decreasing insurance might not suit everyone.
If you’re an older buyer with a short mortgage term, the cost difference between decreasing and level term insurance becomes smaller. You might prefer the consistency of level cover.
People with substantial debts beyond their mortgage.
Credit cards, personal loans, and other obligations don’t decrease in the same predictable way as mortgages. Level term insurance might provide better overall protection for your family.
If you’re expecting significant career progression and income growth, level term insurance could prove more suitable. Your family’s lifestyle and expenses will likely increase over time, so maintaining consistent cover makes more sense.
Those people with an interest-only mortgage. With an interest-only mortgage the balance stays the same each year, as you are only paying the interest. So having a decreasing cover policy will create a shortfall right from the start.
Comparing your options
When choosing life insurance, your main alternative to decreasing cover is level term insurance.
Level term maintains the same payout throughout the policy – if you insure for £500,000, your beneficiaries receive that amount whether you die in the first year or the last year.
Cost
Decreasing term always costs a bit less each month.
You might be able to save 10-15% compared to level term. However, level insurance offers better long-term value because you’re getting significantly more potential benefit for the extra cost.
Sum assured
As we’ve said, each year the potential payout on a decreasing policy goes down, against a level policy which does not change.
Flexibility
Level term adapts better if you’re planning to move house, extend your mortgage term, or switch to interest-only payments.
It also suits families expecting lifestyle inflation – your mortgage might be your biggest worry now, but children’s education, holidays, and living costs grow substantially over time.
Decreasing cover assumes your financial obligations follow a predictable downward pattern, which isn’t always realistic.
Which one to choose?
There’s no right or wrong choice.
Well, except if you take out a decreasing term assurance to cover an interest-only mortgage!
But apart from that it is very much personal choice. Level cover costs a bit more each month but would provide more money for your family in years to come.
Understanding the costs
Several factors determine how much you’ll pay for cover, with age being the most significant. Insurers base their pricing on statistical life expectancy, so younger applicants pay substantially less than older ones.
Age and pricing
Healthy young people pay less than healthy old people.
Lifestyle factors
Your lifestyle choices matter enormously.
Smokers pay roughly double the premiums of non-smokers. Even if you quit smoking, you’ll need to be smoke-free for at least 12 months before insurers consider you a non-smoker for pricing purposes.
Health conditions affect premiums, though not always in obvious ways. Well-controlled diabetes or high blood pressure might add 25-50% to your premiums. More serious conditions could double or triple costs, while some might make you uninsurable with certain companies.
Occupation and hobbies
The risks associated with your occupation and hobbies will influence pricing.
Office workers get standard rates, while firefighters, oil rig workers, or professional divers face higher premiums. Similarly, dangerous hobbies like mountaineering or motor racing can increase costs.
Cover amount and term
The more insurance cover you want, the higher the premium. Equally, the cost rises as the term of the policy gets longer.
Get expert advice
Let Unbiased match you with an independent life insurance expert. Getting started is easy, fast and free.
Common myths and misconceptions
Let’s clear up some widespread misunderstandings about decreasing life insurance that might be affecting your decision-making.
Myth 1: It’s the same as mortgage payment protection
The biggest myth is confusing this with mortgage payment protection insurance (MPPI).
These are completely different products.
Payment protection insurance covers your monthly mortgage payments if you can’t work due to illness, accident or unemployment.
Decreasing life insurance pays a lump sum when you die, regardless of the cause.
Myth 2: Premiums get cheaper over time
Another common misconception is that premiums get cheaper over time.
They don’t.
Your monthly payments stay exactly the same throughout the policy term. Only the potential payout reduces, not what you pay each month.
Myth 3: Limited cover for cause of death
Many people think this insurance only covers natural death, excluding accidents or suicide.
Or some think it only covers death by accident.
Neither is true.
Like all life insurance, it covers death from any cause after the initial exclusion period (usually 12-24 months for suicide, none for accidents).
Myth 4: Work insurance is enough
Some believe their workplace life insurance makes personal cover unnecessary.
Employment benefits can include death cover – perhaps two or four times your annual salary. This might not be enough to clear your mortgage, and you lose this cover if you change jobs or become self-employed.
Myth 5: Always the cheapest option
There’s also a myth that decreasing term insurance is always the cheapest option. While it usually costs less than level term insurance initially, the difference isn’t always significant, especially for older applicants or shorter policy terms.
Myth 6: Perfect health required
Finally, some believe you need perfect health to get life insurance.
While serious health conditions affect pricing and availability, many conditions don’t prevent you from getting cover. Insurers assess risk individually, and specialist underwriters can often find solutions for complex cases.
Myth 7: Guarantees to pay off your mortgage
The policy does not guarantee to pay off the mortgage. The sum assured is calculated to broadly follow the reducing balance of a repayment mortgage, based on an average interest rate, not your actual mortgage.
Read more
How Does Life Insurance Work: A Complete Guide
How does mortgage life insurance work?
Are all mortgages covered by life insurance?
Can You Have More Than One Life Insurance Policy?
Can you add life insurance to your mortgage?
What happens to your mortgage if you die without life insurance?
How a financial adviser can help
Mortgage and protection advisers offer several advantages that could save you money and ensure you get the right protection for your circumstances.
Market access and expertise
Independent advisers have access to the whole insurance market, including products not available directly to consumers.
They understand how different insurers assess risk and price their products, which is particularly valuable if you have health issues, unusual occupations, or complex requirements. This expertise often translates into better deals and more suitable products.
Tailored guidance
Experienced advisers can spot when decreasing term insurance isn’t your best option.
They’ll consider your full financial picture, not just your mortgage debt, and sometimes recommend level term insurance or a combination of both types for better overall protection.
Application support
The process becomes much smoother with professional help.
Advisers know how to present information to insurers effectively and can guide you through medical underwriting. For complex cases involving pre-existing health conditions or high-risk professions, they know which insurers specialise in these areas.
When to seek advice
Some situations make professional guidance essential: pre-existing health conditions, high-risk occupations, complicated mortgage arrangements, or multiple dependents with different needs.
Next steps
Decreasing life insurance works well for homeowners with repayment mortgages, when budgets are tight and protection needs are straightforward.
Time works against you in insurance decisions, premiums increase with age and health issues become more likely. Having some protection is far better than having none while you deliberate endlessly about the perfect solution.
To search for an adviser, just click the button below.
find an adviser
Let Unbiased match you to a fully regulated financial adviser. With over 27,000 vetted advisers to choose from you can be sure to find the perfect match for you.
Find a life insurance brokerFrequently Asked Questions
Regular (level term) life insurance pays out the same amount throughout the policy term. Decreasing life insurance reduces the payout each year, making it cheaper initially but providing less cover in later years.
Because your mortgage debt reduces over time. If you die in year 20 of a 25-year mortgage, your family needs less money to clear the remaining debt than they would have needed in year one.
No, your monthly premiums stay exactly the same throughout the policy term. Only the potential payout reduces, you continue paying the same amount each month.
Your insurance cover continues reducing on its original schedule, even if your mortgage balance falls faster. This will create a gap between your actual debt and insurance cover.
Absolutely. Many people combine decreasing cover for mortgage protection with level term insurance for family income replacement. This provides comprehensive protection.
Read more: Can You Have More Than One Life Insurance Policy?
Most insurers use a formula that assumes standard mortgage repayments and a fixed interest rate. The reduction usually happens annually on your policy anniversary, following a predetermined schedule.
Health issues don’t automatically prevent you from getting cover, though they may increase premiums. Some insurers specialise in covering people with specific conditions.
Your insurance cover is separate to your mortgage and will continue unchanged unless you specifically alter it. If your new mortgage is larger, you might need additional cover. If it’s smaller, you might have more cover than necessary.
No. Term assurance policies do not have a cash value, at any point.
If you are able to pay off your mortgage before the policy is due to end then you have 2 choices:
- Cancel the policy and the associated cover
- Keep it going and your family will still receive a payout if you die
A decreasing mortgage life policy is designed for a repayment mortgage, and it’s a good fit for that.
To protect other debts or liabilities an additional life policy will be needed. This would most likely be a level cover policy.
Read more: Can You Have More Than One Life Insurance Policy?
