Protection is optional and never a condition of your mortgage. There is no fee for protection advice. We are paid by commission from the insurer.
If you have a repayment mortgage and you are arranging life cover to go with it, one of the first questions you will be asked is whether you want level or decreasing cover. It sounds like a technicality. It is actually the decision that determines what the policy is for.
The difference in one line
Level cover keeps the same sum assured for the whole term. Year one and year twenty pay the same amount.
Decreasing cover reduces the sum assured over the term, roughly in step with a repayment mortgage. It starts near the balance and finishes near nothing, because by then the mortgage finishes near nothing too.
Why decreasing cover exists
On a repayment mortgage the balance falls every month. By the end of the term it is gone. A policy that pays a fixed amount throughout is, towards the end, insuring a debt that has largely been repaid.
Decreasing cover is designed to track that. The usual label for it is mortgage protection, and the usual reason people choose it is that the job they want done is specifically "clear the mortgage".
Two things are worth knowing about how closely it tracks. The reduction follows an assumed interest rate set when the policy starts, not your actual rate — so if your rate ends up higher than the assumption, the cover can fall faster than the balance does. And it tracks a repayment balance. On an interest-only mortgage the balance does not fall at all, so decreasing cover and the debt move in opposite directions.
Why level cover exists
Because the mortgage is often not the only thing the money needs to do.
A household that loses an income loses more than a mortgage payment. There are years of bills, childcare, and the cost of the surviving parent working less. Level cover keeps its value to the end of the term, which makes it the one people choose when the policy is meant to leave something behind rather than only to clear a balance.
It also does not care what happens to your interest rate, and it does not assume anything about how your balance behaves.
How to tell which question you are answering
It helps to separate two needs that often get combined into one policy.
"Clear the mortgage." That is a debt that reduces, and decreasing cover is built for it — provided the mortgage is on repayment.
"Keep the household going." That is not a reducing need. The bills in year eighteen are not smaller than the bills in year two. Level cover, or family income benefit paying monthly for the rest of the term, answers that one.
Plenty of households have both needs and end up with cover for each, which is not the same as being sold two policies for one job. We will tell you what we think fits and why, and you decide.
The things that catch people out
Term and mortgage term drifting apart. Cover arranged against a twenty-five-year mortgage does not reset when you remortgage onto a new thirty-year term. Reviewing cover when you remortgage is a simple way to keep the two aligned.
Interest-only, or a part-and-part mortgage. Decreasing cover assumes a balance that falls. Check which part of your mortgage actually does.
Choosing on price alone. Comparing a decreasing policy with a level one is comparing two different jobs, not two prices for the same job.
Not putting it in trust. A policy in trust may get the money to named people without waiting for probate, and may fall outside your estate — speak to a solicitor or accountant about that part. We arrange cover in trust as standard, at the point the policy is set up.
Letting it lapse. If you stop paying your premiums, your cover will end. Term policies have no cash-in value, so nothing is returned. If affording it becomes difficult, talk to us before you cancel. Reducing the cover may be an option worth looking at.
Which one should you have?
There is no answer that is true for everybody. It depends on your mortgage type, your term, your household and what you already have.
What we do is establish what the money would need to do, look at what is already in place — employer cover included — and set out what fits and why. There is no fee for the advice; we are paid by commission from the insurer. Protection is optional and never a condition of your mortgage.
The short-form version of this is on our life insurance and protection page, under level or decreasing cover, along with the layers that usually sit around it.
This article is general information, not advice, and not tax or legal advice. Policy terms and definitions differ between insurers and change over time. What is right depends on your own circumstances.
Lawes Financial Limited (FRN 1046161) is an appointed representative of Andrew Charles Consulting Ltd, which is authorised and regulated by the Financial Conduct Authority (FRN 304904).