Posted by admin On December 23rd 2020
With regard to level term assurance, the assured sum remains the same throughout the term. Premiums are normally paid each month or each year, although it is possible for single premium payments to be made.
Level term assurance is frequently used when a fixed amount would be required upon death to repay a constant, fixed-term debt, such as a bank loan. This can also be used to provide family cover in certain circumstances: for example, the term may run until children have finished their full-time education. If it is used for this purpose, the policyholder must be aware that the amount of cover in real terms will be worn down or eroded by the effect of inflation.
With decreasing term assurance, on the other hand, the sum will reduce to nothing over the term of the policy. Premiums could be payable throughout the term, or limited to a shorter period such as two-thirds of the term itself. This kind of policy can be used to cover the outstanding amount on a decreasing debt.
A mortgage protection policy/assurance is the most common use of a decreasing term assurance, being used to cover the amount outstanding on a mortgage repayment scheme. The sum assured is calculated in a way that it remains equal to the outstanding amount on the term, based on a specified rate of interest.
The sum assured, just like the mortgage itself, decreases at a slower rate at the start of the term than it does towards the end.