Wednesday, 9 October 2013

Differences between LTA and DTA (Discuss)

Questions I often get asked is what are the similarities between level term insurance and decreasing term insurance and what are the differences.
Life Assurance
They are both types of life assurance and they both payout a lump-sum if you were to die during the term of the policy. The main difference between the two is that level term insurance remains (as the title suggest) level so if you are insured for a £100,000 pounds for 20 years the policy would payout £100,000 pounds should you die at any time during the 20 years. 
The decreasing term insurance (as the name decreasing might suggest) decreases over time so if you started off with £100,000 pounds over 20 years with full cover on day 1, by the end of the term the policy that would be reduced down to zero.
The main usage for decreasing term insurance is to protect a payment of a repayment mortgage (capital and Interest). That is the type of mortgage where you pay some capital and some interest each month so by the end of the term you owe nothing. So your life insurance needs to mirror that repayment schedule of your mortgage loan.
One positive about decreasing term insurance is the premiums are lower because as you get older and your chance of dying gets higher the level of cover reduces so the premium is lower.
So, to recap, Level Term Assurance remains the same sum assured throughout the policy term and is generally used to provide life cover to pay a lump sum to your beneficiaries should you die (family insurance cover). Decreasing Term Assurance is generally used to cover a loan such as a mortgage. Level is more expensive than decreasing.

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