- Decreasing simply means the amount of life insurance that gets paid out if you die decreases throughout the life of the policy.
- Term is the number of years the policy will be live.
- Assurance is a type of insurance. It's used when the event that is being insured against is certain. Of course, death is certain at some stage! So, 'Assurance' is used. 'Insurance' is different. If you get your car insured you will be covered if you have a bump. However, it's not certain you will have a bump, so it's called 'insurance'.
So, a pure Decreasing Term Assurance policy for a sum assured of £100,000 over a 20 year term would typically pay out...
- £100,000 if the insured person were to die straight away
- £50,000 if they were to die after 10 years
- £25,000 after 15 years
- Nothing if they lived longer than 20 years
In short: nothing. This type of plan has no value at any stage; it only pays cash out if the insured person dies. If they live beyond the term, the policy and the monthly premiums stop and you get nothing back. This is why it's a cheap way of insuring against death.
A non-smoking male aged 35 can get £100,000 decreasing life cover over 20 years for £5.56 per month.*
The reason decreasing term assurance is one the cheapest types of cover is because the insurance company's risk gets smaller all the time; the longer the policy holder lives, the less the insurance company will have to pay out if they die. As a result the premiums are lower.
For people with repayment mortgages; where people have a repayment mortgage the amount they owe the mortgage company decreases all the time. So, if they wanted to ensure their mortgage was fully paid off if they died, a decreasing term assurance plan should fit the bill.
Decreasing term assurance is often referred to as Mortgage Term Assurance, Mortgage Protection or Mortgage Cover. Technically this is incorrect; a Decreasing Term Assurance policy doesn't necessarily have to be used to pay off a mortgage but in practice, it often does.
For someone that wants a decreasing amount of cash to be paid if they were to die within a predetermined timeframe, then Decreasing Term Assurance may be appropriate.