Fixed term versus decreasing term life insurance – what’s the difference?
Purchasing a life insurance policy is a way to gain peace of mind that your family will be taken care of if you pass away unexpectedly.
Life cover can be used to cover bills, pay the mortgage and provide security for your partner or any dependants you have.
When it comes to life insurance, one size doesn’t fit all, and today there are dozens of different brokers and policies that you can choose from to find the one that suits you. Policies can be paid out in a lump sum or as a regular income, you can choose different payment terms and cover amounts, and even get special illness cover.
Two of the most popular types are known as fixed term and decreasing term, and many of the policies you come across will be one of the two.
With so much choice though, it’s important to understand exactly what each policy offers and what the differences are between each so that you are choosing the right cover and that it can actually be of benefit to your family in the event you pass away.
Fixed term life insurance
Fixed term life insurance is a standard policy, and is very popular because it’s straightforward and easy to understand. When you take out a fixed term insurance policy you choose how much cover you want and how long you want the cover to last, typically a period between 10 – 25 years. If the policyholder dies unexpectedly while the policy is still in term, it will pay out, if the policy holder lives beyond the term then the policy will pay nothing.
Many people choose fixed term insurance policies because of their simplicity. If you know you will have dependants – for example, children – who rely on your income then you may choose to take a policy that lasts only as long as you intend to work or that they will be living with you.
If you’re interested in a fixed term policy, you can compare prices and get quotes online from comparison websites like Moneysupermarket and Compare the Market, or go directly through a broker like the Post Office or Direct Line.
Decreasing term life insurance policies work a little differently. Designed as a more affordable option, decreasing term policies – also known as mortgage life policies – work by paying out a smaller sum over time. Most people buy a decreasing term policy to coincide with a loan or a mortgage, where the sum paid out will be roughly equivalent to the value of the debt. The amount of cover decreases slowly over time in line with whatever your outstanding debt is.
Though decreased term life insurance policies may seem more complicated, they are often easier and more affordable if you’re looking for peace of mind but don’t necessarily want to pay into an expensive policy each month. Premiums are typically guaranteed at the beginning of the policy so the price won’t change and you’ll get the cover you need to ensure you never leave any debts behind.