decreasing term insurance
Decreasing Term Insurance is life cover where the payout shrinks over the years, usually to match a mortgage or loan that is also shrinking as it gets paid off.
In plain English
"Why does my cover reduce every year? I am still paying the same premium o." Bisi asked her broker this after reading her policy document twice.
"That is exactly the point," the broker said. "Your mortgage balance is shrinking every year too. The insurance is just shrinking alongside it. You are not paying for cover you no longer need."
Here is the logic. Bisi took a ₦20,000,000 mortgage on a flat in Lekki. In year one, if she dies, the bank still needs the full ₦20,000,000 to be cleared, so her cover starts at that amount. By year eight, she has paid down a good chunk of the loan, so the outstanding balance might be ₦11,000,000, and her decreasing term policy now pays out roughly that amount, not the original ₦20,000,000.
This is different from a normal term insurance policy, where the payout stays flat for the whole period regardless of what else is happening in your life. Decreasing term is built specifically for debts that reduce over time, mortgages, car loans, business loans with a repayment schedule. The insurer is betting that your need for protection is falling, and they price the premium lower than flat term cover because of it.
A Nigerian in Manchester paying off a mortgage might choose this exact structure with a UK insurer, because the logic of matching cover to a shrinking loan works the same whether the property is in Lekki or Leeds. Back home, someone might pair it with a business loan from a bank that insists on life cover as a condition for lending.
The calm benefit is cost. Because the insurer's liability falls every year, decreasing term insurance is usually cheaper than a flat term policy with the same starting sum assured, which matters if you are already stretching your salary to service a loan.
Tunde borrows ₦8,000,000 to buy a delivery van for his logistics business, repayable over five years. He takes decreasing term insurance starting at ₦8,000,000. By year three, his outstanding loan is ₦3,200,000, and that is roughly what the policy would pay if he died then, not the original ₦8,000,000.
Questions people ask
Is decreasing term insurance cheaper than regular term insurance?
Usually yes, because the insurer's risk falls every year as your cover amount shrinks, so premiums are typically lower than a flat term policy with the same starting sum assured.
What happens if I pay off my loan early?
You can usually cancel the policy since its purpose was tied to that specific debt, though check your policy document because some people keep reduced cover running for other reasons.
Does the premium reduce along with the cover amount?
No, in most decreasing term policies the premium stays level throughout the term even though the payout amount reduces each year, which is part of how insurers keep the pricing simple.
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