Decreasing Term Insurance Calculator

Complete Guide to Decreasing Term Insurance UK 2026

What is Decreasing Term Insurance?

Decreasing term insurance — also called mortgage protection insurance — is a life insurance policy where the level of cover (sum assured) reduces over the policy term. It is specifically designed to mirror the outstanding balance on a capital repayment mortgage. As you pay down your mortgage each month, both your debt and the policy payout reduce together. If you die during the policy term, the insurance pays enough to clear what remains of your mortgage, ensuring your family does not lose the family home.

The key distinction from other life insurance types is that the death benefit is not fixed. In year one of a 25-year £250,000 policy, you might be covered for approximately £247,000. By year 12 (the midpoint), the sum assured may have fallen to around £155,000. By year 24, it might be just £12,000. This declining protection matches the declining risk — after all, as the mortgage shrinks, the financial need on death reduces accordingly.

Because the insurer's exposure reduces over time, decreasing term premiums are typically 20–40% lower than equivalent level term cover for the same initial sum assured and term. This makes it the most cost-effective way to ensure your mortgage is covered, provided you have a standard capital repayment mortgage.

How Does the Sum Assured Decrease?

Insurers use an assumed interest rate — typically 7% or 8% per annum — to model the reduction in the sum assured. This assumed rate is built into the policy at inception and does not change, regardless of your actual mortgage rate. The policy assumes it is covering a mortgage at that assumed rate and models the outstanding balance accordingly.

This creates a mismatch worth understanding: if your actual mortgage rate (say 4.5%) is lower than the insurer's assumed rate (7%), the policy's sum assured will reduce faster than your actual mortgage balance. In the early years, this is unlikely to matter much, but over time there can be a modest gap. Conversely, if your mortgage rate exceeds the assumed rate — which is rare at current levels — the policy over-covers you in later years.

The practical implication: if you switch to a repayment vehicle with very low rates, or if you make significant overpayments, it is worth reviewing your policy to confirm it still adequately covers the outstanding mortgage balance.

Repayment vs Interest-Only Mortgage Protection

Decreasing term insurance is purpose-built for capital repayment mortgages — where each monthly payment reduces both the interest and the capital outstanding. If you have an interest-only mortgage, the capital balance does not reduce during the term (you only pay interest each month, with the full capital repayable at the end). In this case, decreasing term cover is inappropriate: a level term policy for the full mortgage amount is the correct product, since your debt remains constant throughout.

Part-and-part mortgages — where part of the loan is on a repayment basis and part is interest-only — require a blended approach: decreasing term for the repayment portion, level term for the interest-only portion, or simply a level term policy for the full amount for simplicity.

Joint Life vs Separate Policies

If you have a joint mortgage, you have two choices for protecting it: a single joint life policy, or two separate single-life policies. A joint decreasing term policy pays out on first death — when the first named policyholder dies, the policy pays the sum assured and then ceases. The surviving partner no longer has any life insurance from that policy, which can leave them exposed, particularly if they have children or ongoing financial commitments.

Two separate single-life policies each provide independent cover. If one partner dies, their policy pays out to clear the mortgage, and the other partner's policy continues in force. If both partners were to die simultaneously — a tragic but real scenario, especially in road accidents — both policies pay. Joint policies are typically 10–20% cheaper than two single policies combined, but the superior protection offered by two singles is usually worth the modest additional premium. For most couples with children, two separate policies are the preferred recommendation from independent financial advisers.

There is also an important practical consideration: if the relationship ends, a joint policy can be extremely difficult to split or assign. You typically need both parties' consent to make any changes, or you must cancel the policy entirely and reapply separately — potentially at older ages and possibly with health conditions that increase the premium. Separate policies avoid this problem entirely.

Critical Illness Add-On

Most insurers offer critical illness cover (CIC) as an optional add-on to a decreasing term policy. This rider pays out the remaining sum assured (in line with the policy at the time of claim) if you are diagnosed with a qualifying critical illness — typically including cancer, heart attack, stroke, kidney failure, organ transplant, multiple sclerosis, and permanent total disability, among others.

Adding CIC to your mortgage protection policy is widely recommended because a serious illness is statistically more likely to prevent you working and maintaining mortgage payments than death, particularly for people in their 30s and 40s. The ABI reports that critical illness claims are approximately three times more frequent than life insurance death claims for working-age policyholders. The cost of adding CIC to a decreasing term policy varies significantly by insurer, age, and health, but is typically 50–100% on top of the base life insurance premium.

When comparing CIC policies, examine the number of conditions covered (some policies cover 50+, others fewer than 30), the definitions used (a broader definition of cancer, for example, provides greater protection), and whether children's CIC cover is included. Definitions vary considerably between insurers and can make a substantial difference in the event of a claim.

Waiver of Premium

Waiver of premium is an additional benefit that suspends your insurance premium payments if you become unable to work due to illness or injury, typically after a deferred period of 26 weeks (six months). During the waiver period, the policy continues in force — providing full cover — without you needing to pay premiums. This is particularly valuable for the self-employed who have no employer sick pay. The additional cost is modest — typically £3–£8 per month depending on occupation and age — and is generally considered good value for the protection it provides.

Indexation: Should You Index-Link Your Policy?

Indexation allows the initial sum assured and premium to increase each year in line with inflation (usually RPI or a fixed percentage such as 5%). This is primarily relevant for level term policies where the real value of a fixed payout erodes over time with inflation. For decreasing term mortgage protection, indexation is less commonly needed because the policy's purpose is specifically to match the mortgage balance, not to maintain real purchasing power. If anything, adding indexation to a decreasing term policy could cause the sum assured to temporarily exceed the outstanding mortgage balance, effectively turning it into a hybrid product. Most decreasing term policies do not include indexation options for this reason.

Writing a Decreasing Term Policy in Trust

Writing your life insurance policy in trust is one of the most important and yet frequently overlooked steps in setting up coverage. When a policy is written in trust, the proceeds are paid directly to the named trustees (typically your partner and/or children) rather than into your estate. This means the payout bypasses the probate process — which can take months — and the funds are available quickly to repay the mortgage. Crucially, it also means the payout is not subject to inheritance tax (IHT), which applies to estates above £325,000 (the nil-rate band, plus potentially the residence nil-rate band of £175,000).

Setting up a trust is free and straightforward — most insurers provide a simple trust form at policy inception. For a married couple with a jointly held mortgage, the surviving partner is usually the intended recipient, so a simple absolute trust or survivor's discretionary trust is appropriate. You should review your trust nomination periodically — particularly after life events such as marriage, divorce, or the birth of children — to ensure the right people are named.

What Happens on a Claim?

When a claimant (or their representative) notifies the insurer of a death, the insurer will request a death certificate and the original policy document (or confirmation that it is held in trust). The claim is assessed and, if valid, the sum assured at the time of death is paid. Claims are typically processed within a few weeks, though complex cases or disputed circumstances can take longer. The ABI reports that UK life insurers paid 98.3% of term life insurance claims in 2023, with an average payout of £79,304. Reasons for declined claims most commonly include non-disclosure of medical history at application, so it is essential to answer all questions truthfully when applying.

Insurer Comparison Checklist

When comparing decreasing term policies, consider the following factors beyond the headline premium:

• Financial strength: Check insurer credit ratings (AM Best, Moody's, S&P). Major UK life insurers include Aviva, Legal & General, AIG Life, Royal London, Vitality, Zurich, and LV=.
• Claims record: Review each insurer's annual claims statistics, published in their claims data reports.
• Critical illness definitions: If adding CIC, compare the number and breadth of covered conditions carefully — this varies significantly.
• Terminal illness benefit: Most policies include a terminal illness benefit that pays out early if you are diagnosed with a terminal illness with a life expectancy of 12 months or less.
• Children's benefit: Some policies include free children's life and critical illness cover up to age 18 (or 21 in full-time education).
• Assumed rate: Ask what interest rate the insurer uses to model the sum assured decrease — lower assumed rates mean the cover decreases more slowly, which is more protective.
• Exclusions: Check for standard exclusions (suicide in first 12 months, non-disclosure). Adventure sports and travel exclusions may apply depending on your lifestyle.

Getting the Right Advice

While online comparison sites (MoneySuperMarket, Compare The Market, GoCompare) provide a useful starting point for premium comparison, they present limited information about the quality of cover. A whole-of-market independent financial adviser (IFA) or protection adviser can search all available insurers, including those not on comparison sites, and advise on the most suitable policy type, level of cover, and additional benefits for your specific circumstances. Many protection advisers provide advice free of charge, earning commission from the insurer on placement of the policy. Check that your adviser is FCA-authorised at register.fca.org.uk.

Sources & Methodology

This calculator uses standard mortgage amortisation formulae to model the outstanding balance curve and indicative premium estimates based on typical insurer market rates. Premium estimates are illustrative only.

• FCA — Life Insurance Consumer Information
• ABI — Life Insurance Statistics and Guidance
• MoneyHelper — Life Insurance Guide