Decreasing life insurance: check the cover against the mortgage

Decreasing life insurance has a benefit amount that reduces over time under the policy's schedule. It is often used alongside a repayment mortgage, but the policy does not necessarily track the actual mortgage balance automatically. Changes to borrowing, interest rates or the mortgage term can create a mismatch.

The useful check is to compare the insurance schedule with the loan that exists now. The original mortgage amount alone is not enough to establish that the current balance is covered.

Distinguish level and decreasing cover

Level term insurance generally maintains a stated benefit through the agreed term, unless changed under the contract. Decreasing cover follows a reducing schedule. Neither description establishes the premium, exclusions or circumstances in which a claim is valid.

Legal & General explains level and decreasing term cover, including the connection between decreasing cover and repayment mortgages. The explanation is from an insurer; it does not make its particular product appropriate for every borrower.

An interest-only mortgage has a different capital repayment pattern from a repayment mortgage. Do not assume a reducing insurance benefit matches a debt whose principal remains outstanding until the end.

Compare current figures on the same date

Obtain the latest mortgage balance and the insurer's benefit schedule or current cover amount. Use consistent dates and distinguish the loan balance from the amount required to redeem it, which can involve additional costs.

Suppose the mortgage redemption amount is £172,000 and the policy would currently pay £160,000 on a valid claim. The apparent gap is £12,000 before considering any other resources or relevant conditions. The original loan and insurance may both have started at £220,000, but that does not eliminate today's difference.

If the policy amount is greater than the debt, identify whether the excess supports another need or is simply an incidental consequence of the schedule. Do not reduce cover without reassessing the household's wider position.

Check the assumptions behind the reducing schedule

Ask how the insurer calculates the decline and which mortgage repayment assumptions it is designed to reflect. Legal & General's decreasing-cover questions illustrate why the product and loan details need to be considered together.

The mortgage's actual path can change with interest rates, term extensions, payment arrangements or additional borrowing. The insurer may not receive those changes automatically. A bank or broker arranging the mortgage does not necessarily update a separately held protection policy.

Keep the comparison practical: what is the benefit at relevant future dates, what is the projected debt under the current terms and where could a gap arise? Use the lender's projection rather than assuming capital falls in equal annual amounts.

Review when remortgaging or borrowing more

A new mortgage can have a different balance and end date even if the property and borrowers are unchanged. Check whether existing cover lasts for the full intended period and whether its amount remains appropriate.

For example, if a mortgage is extended by five years beyond the policy's end date, there is a period with no cover from that policy after expiry. An adequate benefit today does not address that later gap.

Before replacing cover, obtain accepted terms for the new arrangement. Age, health and underwriting can affect availability and cost. An old policy may contain features worth understanding before it is cancelled.

Keep household support separate from debt repayment

Clearing a mortgage can remove a large monthly payment, but the family may still need income for food, childcare, transport and other living costs. A reducing policy designed around one debt may not address those continuing needs.

MoneyHelper's protection guidance encourages considering priorities and the actual protection required. Build a separate account of household needs rather than assuming mortgage cover is complete family cover.

The appropriate arrangement may involve different amounts or terms for different purposes. Any recommendation should explain that structure in ordinary language and avoid counting the same policy proceeds as both full mortgage repayment and an untouched income fund.

Check what event the policy covers

Life cover, terminal illness provisions and critical illness benefits are not interchangeable. If an illness benefit is included or added, establish its definitions, exclusions and effect on the remaining life cover after a claim.

A policy being described as mortgage protection does not mean it necessarily covers unemployment, every illness or missed payments generally. Ask the adviser to identify the insured events rather than relying on the marketing category.

Also establish ownership and who receives proceeds. The intended use may be mortgage repayment, but the legal payment route depends on the actual arrangement and documents.

Keep the review tied to changes that matter

Useful review triggers include a mortgage change, additional borrowing, a new dependant, separation or a material change in existing employer benefits. There is no need to replace a policy merely because an anniversary has arrived.

Retain the mortgage statement, cover schedule and explanation of any decision. A clear review should show whether the mismatch is in amount, duration, insured event or payment destination. Those are different problems and may require different responses.

Related guides: financial advisers and mortgage brokers, financial advice after divorce and questions about adviser remuneration.