A Guide To Life Insurance - Decreasing Term Assurance ....


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Decreasing Term Assurance...

The most widely used variant of term assurance is decreasing term assurance.

This is usually used to ensure that a mortgage debt is repaid in the event of the borrower's death; building societies may require it to be taken out in conjunction with a loan when the sum lent on mortgage is large in relation to the value of the property.

With the normal building society mortgage, the amount of capital repaid is small in the early years and increases rapidly towards the end. The sum assured under a decreasing term assurance matches the amount of capital outstanding and is matched to the term of the mortgage (usually 25 years).

Because the sum assured declines as age and mortality increase, the cost of such policies is low, especially for the young borrower: a 25-year-old man would pay only about £2114 a year for a policy to guarantee the repayment of a 25-year-loan of £2110,000.

Single-premium policies are also available. see http://www.moneysavingexpert.com/mortgages/cheaper-life-insurance

In this case, one payment covers the entire term, and this premium can be added to the amount of capital advanced by a building society so that the annual cost becomes part of the normal mortgage repayment.

Decreasing term assurance for this purpose is very cheap and a borrower with dependants would be unwise not to take advantage of it.

One point that is not always taken into account is that, if the property and mortgage are in joint names and the wife is working, the couple may be equally vulnerable financially on the death of either of them. In this case, the decreasing term assurance should be on a joint-life basis, i.e.

the sum assured would be payable on the death of either. Incorporating this provision will add about 25% to the cost, but in cash terms the amount involved will be small and the precaution is well worth taking.

The Guide To Life Insurance - Read On? ....

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Read On: read next:for Term Assurance Example 3

Another factor worth remembering is that changes in the rate of interest charged by building societies on existing mortgages may affect the sums involved.
When the interest rate is raised, existing borrowers normally have the right to extend the term of their mortgage rather than increase their monthly repayment.
If the term is extended, then the amount of capital outstanding at any time will be higher than under the original loan, and will not be fully covered by the decreasing term........ see: read next:for Term Assurance Example 3


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