Increasing vs Decreasing Term Assurance: Understanding Your Options
You may have already heard of level term assurance whereby the sum assured remains constant throughout the term. However, this may not provide the flexibility that you require.
Understanding the main benefits and drawbacks of both increasing and decreasing term assurance can help you make the best decision when it comes to your bespoke protection needs. Here, we explore some key differences and what they may mean for you.
What happens to the sum assured?
Increasing Term Assurance
As the name suggests, the sum assured will go up each year, and these increases are determined at inception. The increases are often linked to inflation using either CPI or RPI, meaning an increasing term assurance can be a good option to cover a liability upon your death that is affected by inflation.
Decreasing Term Assurance
Conversely, a decreasing policy will do just that—decrease the sum assured each policy year. These policies can be ideal to cover a loan or mortgage where you know the liability will reduce as the loan is paid off. By linking the sum assured to the liability, you are ensuring that you aren’t paying a premium for a level of cover you simply don’t need.
What impact will these changes have on my premiums?
Increasing Term Assurance
Unsurprisingly, with an increasing policy, you can expect the premiums to also increase, but this will not always be at the same rate as the increase to your sum assured. The main reason for this is due to your age at the point of premium increase.
Let’s say, for example, you take a policy out at the age of 50 for a premium of £100 a month and a sum assured of £100,000. You enjoy increases each year to your sum assured that equate to 5%, meaning that your sum assured in the second policy year has risen to £105,000. Logic would assume a premium rise of 5% to £105, right? However, as you are now 51 years old, the likelihood of you passing away, and thus the insurer having to pay out, has increased. The increased risk to the insurer is taken into account when calculating your premiums year on year.
Decreasing Term Assurance
Unlike with increasing policies, any future decreases are taken into account at outset. This means that the premium for decreasing policies typically remains guaranteed and set at outset. An added benefit of this approach is that you have clarity and certainty over your premiums at the start of the policy and can therefore factor these costs into your budget.
What term options are available?
For both policy types, you can choose a term that suits your own needs. These vary between providers but typically can be anywhere between 5 and 40 years, making term assurance a great option to give absolute peace of mind over a set timeframe.
Did you know?
According to the latest State of the Protection Nation report from Royal London, 42% of people with a mortgage have no life cover in place.
The final word…
It’s important to carefully consider your financial situation and goals before choosing any protection policy. Increasing term assurance can offer protection against the rising cost of living, but it might also come at a higher initial cost compared to level or decreasing term insurance.
Ask yourself, what does this policy need to cover in the event of my passing?
This article does not constitute financial advice and, as with any financial decision, it’s recommended to consult with a financial adviser who can help determine the most suitable policy for you.
