Level cover or decreasing cover: which fits your mortgage?

Level cover and decreasing cover answer different questions, and the mortgage is only part of what you're protecting. Before comparing level and decreasing cover, it helps to work through how much cover you need and for how long. Once you know those figures, you can decide which structure suits your situation.

What a level policy pays

A level policy pays the same sum assured whatever year of the term a claim falls in. Choose cover for a fixed amount over a twenty year term and that is the amount paid, whether the claim comes in year two or year nineteen. Nothing about the payout shrinks as the term goes on.

What it's typically used for

Because the amount stays fixed, level cover suits costs that don't fall away on a schedule. A mortgage balance goes down every time you make a repayment, but these costs don't follow the same curve:

• Replacing an income, for as long as children are dependent on it
• Childcare and school costs tend to rise as children get older.
• Everyday household spending, food, bills, clothing, that carries on regardless of what's left on the mortgage

These are the costs a family would still face in year fifteen much as they would in year one, which is why a flat payout fits them better than one that tapers.

Why new parents often need it alongside mortgage cover

Decreasing cover, the kind that falls each year roughly in line with what's left on a repayment mortgage, deals with one thing well: the loan. It was built to clear what's still owed on the house if a parent dies partway through the term. It wasn't built to replace a wage or pay for school uniforms five years from now.

That's why many new parents end up holding both. Decreasing cover sized to the mortgage takes care of the loan. Level cover sized to living costs takes care of everything the mortgage payment was never meant to cover. Looking at the two side by side is usually the point where the gap becomes obvious.

Decreasing cover pays a sum that gets smaller each year of the policy. The sum assured is at its highest on day one, then steps down annually, so a claim made near the end of the term pays a good deal less than a claim made in the first year.

Before comparing level and decreasing cover, it helps to work through how much cover you need and for how long. Once you know those figures, you can decide which structure suits your situation.

How the fall tracks a repayment mortgage

The shape of the fall is built to roughly follow a repayment mortgage balance, because that is what most of these policies are bought alongside. With a repayment mortgage, each payment puts more toward the capital and less toward interest as the years go on, so the outstanding balance falls faster later in the term than it does at the start. A decreasing policy is built to fall in a similar pattern.

Say a repayment mortgage starts at £200,000 over 25 years. Early on, the balance is still close to that figure, because most of each payment is still going on interest. By year 20, with most of the capital repaid, the balance might be down to a fraction of that. A decreasing policy sold against that mortgage is built to fall along a similar curve, so the cover remaining at any point stays close to what you would still owe.

It will not match your mortgage balance exactly, because the two curves are built on different assumptions about interest rates and repayment patterns. The cover calculator can show the shape of this against your own mortgage figures, though its output is a starting point for your thinking rather than a figure to rely on outright.

Why it costs less than level cover

For the same starting sum assured, decreasing cover is typically cheaper than level cover, because the insurer is paying out less, on average, over the life of the policy. Level cover pays the full amount whether the claim comes in year one or year twenty-five, so it is priced on that full amount being at risk the whole time. With decreasing cover, the amount at risk falls every year, and the price falls with it.

A decreasing policy is built to fall at roughly the same pace as a repayment mortgage balance falls. That works as long as the mortgage behaves the way a repayment mortgage normally does. In three common situations it doesn't, and the gap between what the policy pays and what's actually owed can be larger than it looks at the time you take the policy out.

Before weighing up level against decreasing cover, it helps to work through how much cover you need and for how long on the cover amount and term guide. Once you know those figures, you're in a better position to see where a falling sum assured would leave you short.

An interest-only mortgage

On an interest-only mortgage, you pay the interest each month and the balance you owe stays where it started until the end of the term. A decreasing policy keeps falling regardless, because it's following its own schedule. Ten years into the term you could still owe the full amount, while the cover has already dropped by half.

A remortgage that extends the term

Remortgaging often means adding years back onto the loan, sometimes to lower the monthly payment, sometimes because the term was shortened earlier and needs stretching again. The decreasing policy you already hold keeps running on its original schedule and reaches zero before the new, longer mortgage term does. The cover needs to be reset to the new term, or the gap at the end sits there unnoticed until it's needed.

A family whose living costs grow

Decreasing cover is sized to a mortgage balance. As children get older, the costs around them tend to rise, school activities, clothes, food, all of it. Where the cover is meant to replace income for day-to-day living, a falling sum assured works against the thing it's meant to protect.

The calculator on LifeInsuranceQuotation.co.uk draws the year-by-year payout for a level and a decreasing policy side by side against your own mortgage term and children's ages, so you can see whether either shape actually tracks what you'd owe and spend in the years that matter. The figures it shows are a starting point for your own thinking, not a recommendation, and the tool can only work from what you put into it.