Decreasing term mortgage protection

How it works

The policy has a reduction schedule fixed at issue, based on assumptions about the loan's rate and term. The premium usually stays level while the benefit steps down.

Because the average amount at risk is lower than level coverage of the same starting size, the premium is lower.

Where the schedule drifts

• You refinance, resetting the balance and the term
• You take a home equity loan or line against the property
• The loan is adjustable-rate and amortises differently than assumed
• You take a forbearance or payment deferral
• You make extra payments, so the coverage exceeds the balance

The bigger limitation

Even where the schedule tracks the loan precisely, the coverage only ever addresses the loan. A family that loses an earner still needs income, childcare and everything else, and by the later years a decreasing policy has little left for any of it.

Sizing coverage to the whole need rather than the balance is usually the better approach.

When it makes sense

• The loan genuinely is the only concern and other coverage handles the rest
• The budget won't stretch to level coverage — some protection beats none
• A fixed-rate loan you're confident you won't refinance
• Supplementing a level policy that already covers the family's income need

Before signing

• Get the actual reduction schedule in writing, not a description
• Confirm the premium is level for the full term
• Ask whether it's convertible — many decreasing policies aren't
• Confirm who the beneficiary is
• Quote level coverage at the same starting amount and compare