Definition
Decreasing Term Cover
Decreasing term cover is a term plan whose sum assured reduces over time, typically aligned with a falling loan balance.
Designed mainly to protect a reducing-balance loan, decreasing term insurance has a sum assured that declines each year roughly in step with the outstanding loan, so on death the payout clears the remaining debt. It is the structure behind much credit life insurance.
Because the average cover is lower over the term, premiums are cheaper than level term. However, many advisers prefer a level term plan even for loan protection, since it is portable across loans and leaves surplus cover for the family once the loan is repaid.
Related terms
- Credit Life InsuranceCredit life insurance is a policy that repays an outstanding loan if the borrower dies, disabling the debt from burdening the family.
- Increasing Term CoverIncreasing term cover is a term insurance option where the sum assured rises each year by a fixed percentage to counter inflation.
- Term InsuranceTerm insurance is pure life cover that pays your family a large sum if you die during the policy term, in exchange for a low premium.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.