“We’ve got a repayment mortgage. Should our life insurance be decreasing or level?” It is one of the first protection questions people ask when they buy a home, and the cheaper answer is not always the right one.
Both are term insurance: they pay a lump sum if you die during a set number of years, and nothing if you outlive the term. The difference is what happens to the amount of cover over those years, and that decides what the payout can do for the people you leave behind.
How each one works
Decreasing term insurance starts at the size of your mortgage and falls each year, roughly in step with the balance of a repayment mortgage. Because the insurer’s exposure shrinks over time, it is the cheaper of the two. It is designed to do one job: clear the mortgage.
Level term insurance pays the same amount whether you die in the first year or the last. It costs more for the same starting amount, but in the later years it would clear what is left of the mortgage and leave a sum over for the household.
Life insurance is not a legal requirement for a mortgage, and most lenders do not insist on it. It is there for the people who would still be living in the house.
When decreasing cover makes sense
- The mortgage is the only gap: other cover, savings or a partner’s income would look after day-to-day spending.
- The budget is tight: some cover that fits the budget is better than a larger policy that gets cancelled in two years.
- It sits alongside other cover: for example a death in service benefit from an employer, or family income benefit for the household costs.
When level cover is worth the extra
- You have an interest-only mortgage, or part of it is interest only. The debt does not fall, so decreasing cover would leave a shortfall.
- You have children or a partner who relies on your income. A cleared mortgage removes the biggest bill, but not the food, childcare and energy bills.
It doesn’t have to be one or the other
Decreasing and level cover can sit side by side, and many insurers let you hold both on the same plan: decreasing cover to clear a repayment mortgage, and level cover for the extras, such as childcare costs or school fees.
The advantage is that the extra cover is there in full from day one. Compare that with a single level policy for the amount of the mortgage. The part left over for your family only builds up as each mortgage payment reduces the debt, so there is least to spare in the early years, when children are young and the need is greatest, and more than is needed in the later years.
Our life insurance calculator helps you put a figure on the extras.
The traps worth knowing about
The cover can fall faster than the mortgage
A decreasing policy reduces on a schedule that assumes a particular interest rate. With a repayment mortgage the balance falls slowly at first and faster towards the end, and the higher your rate, the more slowly it falls in the early years. If your mortgage rate is above the rate the policy assumes, the cover can drop below what you owe. Check the assumed rate in the policy documents and compare it with your own.
The policy does not follow the mortgage
Remortgaging, borrowing more, extending the term or moving house does not change your life insurance. The policy carries on with its original amount and end date. It is worth checking the cover every time the mortgage changes, before assuming it still fits.
A joint policy pays out once
Joint life cover is usually a little cheaper than two single policies, but it pays out on the first death and then ends. The surviving partner is left with no cover, at an age when new cover costs more. Two single policies cost more, but each pays out separately.
An illustration
Jane Example, 34, has a £200,000 repayment mortgage over 25 years and a two-year-old son (illustrative). Decreasing cover of £200,000 would clear the mortgage if she died at any point in the term, as long as the policy’s assumed rate keeps pace with her mortgage. Her partner would own the house outright, but would still be paying for childcare and running the home on one income.
A single level policy of £200,000 would cost more each month, and in the early years it would do little more than clear the mortgage. The sum left over would only grow as the mortgage shrank, so by the time it was large her son would be grown up.
The alternative is decreasing cover of £200,000 for the mortgage, with level cover of, say, £100,000 on the same plan for childcare and running costs (illustrative). Her family would have the full £100,000 for the extras from the first day. Whether that is the right mix depends on what else Jane has in place, which is exactly the question to answer before choosing.
A sensible sequence
- Check what you already have: employer death in service benefit, existing policies, and whether any are joint.
- Note your mortgage type, balance, rate and remaining term.
- Decide what the payout needs to do: clear the mortgage only, or also replace income.
- Choose the type of cover to match, and check whether the premiums are guaranteed or can be reviewed.
- Ask about writing the policy in trust, so the money can reach your family without waiting for probate.
It is not unusual for that check to show that the cover you already hold is adequate, or that a small change is all that is needed.
For more on how mortgages themselves work, see our guide to residential mortgages explained. If you would like to talk it through before deciding, the first conversation is free and carries no obligation. You can read more about our protection and insurance advice in Kent, our mortgage advice in Kent and how our charges work.
Questions we are often asked
Is decreasing life insurance worth it?
It can be, if its only job is to clear a repayment mortgage and other needs are covered elsewhere. It is the cheaper way to protect the mortgage, but on its own it leaves nothing over for the household.
Do I need life insurance to get a mortgage?
It is not a legal requirement, and most lenders do not insist on it. It is worth considering if anyone would struggle to keep up the repayments without you.
What happens to my life insurance if I remortgage?
Nothing changes automatically. The policy keeps its original amount and end date, so check that it still matches the new mortgage, especially if you have borrowed more or extended the term.
Can I have both decreasing and level cover?
Yes, and many insurers let you hold both on the same plan. Decreasing cover clears the mortgage, and level cover pays a fixed sum for extras such as childcare or school fees from the first day.
The information on this page is for information purposes only and does not constitute individual financial advice. Policy terms and conditions vary between insurers. Trusts are a legal arrangement and their tax treatment depends on individual circumstances and may change in the future.
As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION ADVICE.
Important information
The information on this page is for information purposes only and does not constitute individual financial advice.
As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments.
About this article
All details are correct at the time of writing (see the date at the top of this article). Information within this article is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored advice and is for information purposes only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on individual circumstances.
