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What is term life insurance?
Term life insurance is a basic life insurance policy that offers a cost-effective way of providing life cover for a fixed period of time. Term life insurance policies are typically taken out for between 1 and 25 years and used to insure a specific liability for a known timeframe. A term policy will pay out the sum assured (death benefit) if the life assured dies during the fixed term period. After the fixed term period ends, the life cover ends. Term insurance life cover has no cash value and accrues no investment value.
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What is decreasing term life insurance?
Decreasing term life insurance provides a declining level of term insurance cover throughout its fixed term. The sum insured (death benefit) reduces over the term of the life policy. Decreasing term life insurance is different to term life cover which provides a fixed level of cover throughout the term of the policy. A decreasing term life policy will be cheaper than a term life policy because the sum insured is reducing over the life of the policy rather than staying the same throughout the policy term. Decreasing term insurance reduces the risk of the insurer having to meet a claim for the initial sum assured because of the reducing cover.
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Why use decreasing term life insurance?
Decreasing term insurance offers a cheap and effective way of providing life cover on a reducing sum assured for a fixed period of time. Decreasing term insurance is used to cover a specific debt that is itself reducing over time, with the policy paying out in the event of the death of the life insured. The term is usually selected to align with the associated debt or liability that the life insured wishes to cover.
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Examples of when to use decreasing term insurance
Repayment Mortgages: Covering a repayment mortgage on a home loan can be achieved with a decreasing term insurance policy. The reducing level of life cover matches the reducing mortgage debt over a fixed period of time, typically up to 25 years. The decreasing term life policy should be selected to align with the mortgage term.
Potentially Exempt Transfers: Covering large financial gifts of property, investment portfolios or cash to friends or family may be considered to be Potentially Exempt Transfers (PETs) under United Kingdom tax law. Gifts made under this rule are subject to a decreasing level of taxation over a 7 year period. Decreasing term insurance can be used to cover the fixed period under which taxation could occur on the gift if the donor died during the 7 years after having made the gift.