Decreasing life insurance calculator

How decreasing life insurance works

Decreasing life insurance pays out if you die during the term, like any term policy. The difference is the amount. It starts at the sum you choose and shrinks each month until it reaches £0 at the end of the term. Most people buy it to clear a repayment mortgage, so insurers make it fall the way a mortgage balance does.

To do that, the insurer treats the cover as a loan being repaid in equal monthly instalments at a set interest rate. The rate is written into the policy terms. Aviva's Life Insurance Plan uses 8%¹, for example, while Beagle Street's policy bought direct uses 6%². The calculator runs the standard repayment formula at that rate:

At 0% the cover falls by the same amount every month. Your mortgage balance follows the same formula at your mortgage rate, which is how the calculator draws the comparison line.

A worked example

Take the example figures: £180,000 of cover over 25 years at 8%. After 5 years, £166,093 is left, only £13,907 less than at the start. The cover drops by £2,356 in year 1 and by £15,971 in the last year. It stays above half the starting amount for 17 years (£98,274 after year 17) and falls below half during year 18.

The fall is slow at first because, on paper, most of each early repayment goes on interest. The higher the policy's rate, the more of the fall is pushed towards the end of the term. So check how it lines up with your own mortgage.

Mortgage life insurance

Mortgage life insurance is the everyday name for term cover set up to pay off your mortgage if you die. For a repayment mortgage that usually means decreasing cover: the same amount as the loan, the same term, falling roughly in step with the balance. It costs less than level cover because the amount the insurer might pay shrinks each year.

You don't need it to get a mortgage. It matters if someone would struggle to keep up the repayments without you, such as a partner on a joint mortgage or children living in the home. To set it up in the calculator:

• Cover: the balance you owe now, from your latest mortgage statement, not the price you paid for the home.
• Term: the years left on the mortgage.
• Mortgage rate: your current rate, to check the cover keeps up. Try a higher rate too, since you'll probably remortgage several times.

A few policies link the payout to your actual mortgage in some cases. LV= says a decreasing Life Protection claim normally pays the actual mortgage balance, if the policy's mortgage conditions are met³. Post Office Life Insurance includes a Mortgage Guarantee for a shortfall caused only by a mortgage rate above 8%, subject to conditions⁴⁵. Read the terms of any policy you're offered to see exactly what it pays.

How much mortgage life insurance costs

The price depends on your age, health, smoking and the amount of cover. For a sense of scale, Beagle Street advertises under £6 a month for £200,000 of decreasing cover over 20 years for a 30-year-old non-smoker⁶⁷. In Royal London's example, a couple aged 34 and 32 would pay £14.38 a month for £260,000 of joint decreasing cover over 24 years⁹¹¹. There are more in the table of published prices below. The rough cost in the calculator is for level cover of your starting amount, so treat it as an upper guide.

When your mortgage rate is higher than the policy's rate

The cover falls at the policy's rate. Your mortgage falls at your mortgage rate. If your mortgage rate is lower, your balance falls faster than the cover and a payout would clear it with some left over. If your mortgage rate is higher, the balance falls more slowly, and for most of the term the cover would be less than you owe.

Take a 6% policy and a 7% repayment mortgage, both £180,000 over 25 years. After 5 years the mortgage would owe £2,214 more than the cover would pay. The gap is largest after 16 years, at £5,126. Royal London warns that if the mortgage rate changes, the payout may not clear the mortgage¹².

Of the 18 policies in our table where the insurer sets the rate, 13 use 8% and 4 use 6%. If you apply through an adviser, several insurers let you choose. To stay safe, pick a policy rate at or above the highest mortgage rate you expect to pay, start the cover a little above the loan, or add a small level policy on top.

Interest-only mortgages need level cover

With an interest-only mortgage you owe the full amount until the last day of the term. Decreasing cover would shrink while the debt stays the same, so use level cover for the whole loan. If your mortgage is part repayment and part interest-only, split the cover: decreasing for the repayment part and level for the interest-only part. Our life insurance calculator covers level cover.

Joint or single policies

A joint policy covers two people and pays out once, on the first death, and then ends. Two single policies cost a little more, but each can pay out. For a joint mortgage either will clear the loan on the first death. It matters after the first claim: with two single policies the surviving partner still has cover of their own.