How much does decreasing term life insurance decrease by each year?

Decreasing term life insurance is a policy where the amount paid out falls over time. It is built to sit alongside a repayment mortgage, where the amount you owe also falls over time. The cover reduces each month until it reaches zero at the end of the term, and it is designed to protect against obligations such as a repayment mortgage¹.

There is no single yearly figure for how much it drops. The cover falls month by month, and the size of each fall changes as the policy goes on, because it is tracking the way a repayment mortgage balance comes down. Providers describe it as reducing roughly in line with the way a repayment mortgage decreases². The cover amount reduces each month for as long as the policy lasts³.

What that means in practice: the payout is largest at the start, when the mortgage debt is largest, and smallest at the end, when the debt is nearly cleared. Independent guidance describes decreasing term as the cheapest of the three main forms of term insurance, because the payout falls over time⁴. Your monthly premiums stay the same throughout, even though the cover does not⁴.

Cover falls on a fixed scale until it reaches zero

The reduction is not a straight line. The policy is set up so the cover roughly follows a repayment mortgage, and a repayment mortgage does not fall by the same amount each year. Early on, most of your monthly payment goes on interest and the balance barely moves. Later, more of it goes on capital and the balance drops faster. Decreasing cover is arranged to mirror that pattern, so the payout falls slowly at first and more quickly towards the end.

The cover reduces each month until it reaches zero at the end of the term¹. It runs for a fixed time, and the cover amount reduces each month for as long as the policy lasts³. The amount of cover reduces roughly in line with the way a repayment mortgage decreases².

That is why there is no simple answer to "how much does it drop each year". The yearly fall is whatever the mortgage-style schedule produces at that point in the term. Two policies with the same starting cover and the same term would follow the same shape, but the amount falling away in year three is not the same as the amount falling away in year 23.

Monthly or yearly: how often the payout drops

The cover is recalculated monthly, not annually. Providers describe the cover amount reducing each month for as long as the policy lasts³, and Zurich's guidance says decreasing cover reduces each month until it reaches zero at the end of the term¹. So the payout is not set once a year and left alone; it moves down in monthly steps.

For a reader, the practical effect is that the payout on any given day is whatever the schedule has reached by then. If a claim is made in the middle of a month, the insurer works from the cover in force at that point. The policy document sets out the schedule, and it is worth reading alongside your mortgage statement so you can see how the two line up.

The premiums do not move with it. Independent guidance states that your monthly premiums remain constant throughout the term⁴, and Scottish Widows describes the arrangement the same way: the amount of cover you choose reduces each month, but your premium remains the same⁷. You are paying a level amount for a payout that shrinks.

Matched to a repayment mortgage balance

Decreasing cover is designed around a debt that gets smaller. Independent guidance puts it plainly: with a decreasing policy, the final payout gets less over time so it matches the amount left on the mortgage⁵. Phoenix describes decreasing term policies as helping to pay off debt that reduces over time, such as a repayment mortgage⁸.

That fit is the whole point of the product. If the cover and the mortgage fall at roughly the same rate, the payout at any point should be in the same region as the balance outstanding. The mismatch risk is what happens when the two do not move together, and there are several ways that can happen.

• Payment holidays. A break from paying your mortgage for a few months means payments must be caught up before the term ends, and interest may be charged⁹. Interest keeps being added during the holiday, so you end up owing more¹⁰. Your cover, though, carries on falling on its original schedule.
• Extending the term. If you stretch the mortgage term to reduce the monthly payment, the debt lasts longer than the cover was set up for¹¹.
• Switching to interest-only. Your lender may allow this after a change in circumstances such as redundancy, but the balance stops falling while the cover keeps reducing¹².
• Overpaying. If you clear the mortgage faster than the schedule assumed, the cover may still be higher than the debt, which is not a problem for the mortgage but means you are paying for cover you may not need.

The figures on a repayment mortgage show how sensitive the balance is to rate changes. On a £250,000 mortgage over 20 years at 4.5%, a base rate rise of 0.25 percentage points adds £33.94 a month¹³. On £200,000 over the same term, the same rise adds £27.15 a month, and a 0.5 percentage point rise adds £54.61¹³. Those changes affect how fast the balance comes down, which is the thing the cover is trying to track.

Decreasing or level term: what each costs

The two products do different jobs, and the price difference follows from that.

Independent guidance describes decreasing term as the cheapest of the three main forms of term insurance, because the payout falls over time⁴. Providers say the same in their own words: decreasing term life insurance is usually cheaper than level term life insurance¹⁶, it tends to be cheaper than level term insurance because the payout is decreasing¹⁷, and premiums are lower compared to level cover because the cash sum reduces over time¹⁸. Royal London states that premiums tend to be lower than level term policies¹⁹, LV= says decreasing cover's monthly premiums are usually cheaper than level cover²⁰, and Post Office says that because the payout value decreases over time, monthly premiums are lower than the same policy with level or increasing cover¹⁵.

Level term is priced higher because the insurer may have to pay the full sum whenever death happens during the term, including in the final months. Cavendish describes level term as generally a little bit more expensive than decreasing term insurance and cheaper than whole life insurance²¹. Aviva notes that level term, also known as family protection insurance, pays a payout that does not reduce over time and premiums that stay the same, but costs a little more than decreasing term¹⁴.

For a reader weighing the two, the question is what the money is for. If it is to clear a repayment mortgage, decreasing cover is built for that and costs less. If it is to leave a fixed sum to a family whatever happens and whenever it happens, level term matches that need. There is a fuller comparison in level term or decreasing term life insurance.

What happens if you die near the end of the policy

The policy pays whatever cover is left at the point of claim. Near the end of the term, that may be a small amount, because the cover has been falling towards zero throughout. That is not a fault in the policy; it is the design. The payout is meant to line up with a mortgage balance that is also nearly cleared.

The payout trigger is death during the term, or a terminal illness diagnosis with life expectancy of less than 12 months⁶. Legal & General states that it pays out a lump sum of money if you pass away while covered by the policy or are diagnosed with a terminal illness and your life expectancy is less than 12 months⁶. Evelyn describes decreasing term policies as offering a lump sum that automatically reduces over time²².

Two things can reduce the payout further. If the policy is a combined life and critical illness policy, the final amount paid out on death is reduced if money has already been paid for critical illness²³. And if the mortgage has been extended, paused or switched to interest-only, the balance at the end of the term may be larger than the cover was set up to match.

Why decreasing term is cheaper than level term

The price difference comes from what the insurer expects to pay. With decreasing cover, the amount at risk falls every month, so the insurer's exposure shrinks as the term goes on. With level cover, the full sum is at risk for the whole term. That is why decreasing term is usually the cheapest option⁵, and why independent guidance calls it the cheapest of the three main forms of term insurance⁴.

Providers set out the same reasoning. Cavendish says decreasing term life insurance is usually cheaper than level term life insurance¹⁶ and that it tends to be cheaper than level term insurance because the payout is decreasing¹⁷. Legal & General says premiums are lower compared to level cover, due to the fact the cash sum reduces over time¹⁸. Royal London says premiums tend to be lower than level term policies¹⁹. LV= says decreasing cover's monthly premiums are usually cheaper than level cover²⁰. Post Office says that because the payout value decreases over time, monthly premiums are lower than the same policy with level or increasing cover¹⁵. Scottish Widows notes that the amount of cover you choose reduces each month, but your premium remains the same⁷.

Cost is not the only difference. A cheaper premium buys a payout that shrinks, and that only works if the debt it is covering shrinks at a similar pace. Where the debt does not fall, the cheaper product can leave a shortfall. That is the trade-off a reader is weighing, and it is worth checking the mortgage terms before deciding which shape of cover fits.

Term lengths and what you can choose

The shortest term on the decreasing life policies in this research is five years, and the longest is 50 years. Legal & General's decreasing life insurance has a minimum length of 5 years and a maximum of 50 years⁶, and the same 5 to 50 year range appears in the TSB policy summary for decreasing life insurance²⁴. Legal & General also refers to decreasing life insurance for five years in its short-term cover guidance²⁵.

In practice the term is usually set to match the mortgage. If you take out a new mortgage or remortgage, the term would normally be set to the new mortgage length.

The term matters because the cover reaches zero at the end of it. A term that ends before the mortgage does leaves the final years of the debt uncovered. A term that runs longer than the mortgage means paying for cover after the debt has gone.

Where the protection stops

Decreasing cover pays out on death during the term, and on terminal illness with life expectancy under 12 months⁶. It does not pay out if you are diagnosed with a critical illness that is not terminal, unless the policy includes critical illness cover as an extra. Where a policy combines the two, a critical illness payout reduces the amount later paid on death²³.

There are other limits worth knowing. The cover falls on its own schedule, so anything that changes the mortgage, a payment holiday, an extension or a switch to interest-only, can leave a gap between the payout and the balance. A payment holiday means interest keeps being added and you end up owing more¹⁰, and your monthly payment rises afterwards to include the missed payments and extra interest¹¹. Credit card payment holidays work the same way, with minimum payments rising afterwards because of interest added during the break²⁶.

If you are struggling with mortgage payments, free and impartial help is available. StepChange offers debt counselling²⁷, and its guidance covers mortgage arrears²⁸ and negotiating with creditors²⁹. Shelter Cymru provides support for homeowners after redundancy³⁰. If someone has died and you need to claim, the process is set out in claiming on a life insurance policy after someone dies, and Bereavement Support Payment provides a lump sum and monthly payments for eligible people, with a lower rate of £100 a month³¹.