Do you know what life insurance with decreasing capital is? In this article we give you the keys to understand what the decreasing capital is in life insurance and how it affects you when paying the insurance premium.
Life insurance with decreasing capital
Life insurance with decreasing capital is a very common form of life insurance when this type of policy is contracted linked to a mortgage or a loan, since the insured capital is reduced as the debt with the bank or with the financial institution.
In this way, in the event that it is necessary to request compensation for the death or disability of the debtor/insured, the heirs will have the debt covered. Moreover, in many cases this type of insurance is contracted by putting the bank or financial institution as the beneficiary, so that carrying out the procedures is much simpler.
How does declining capital work in life insurance?
In general, in risk life insurance, a fixed insured capital is specified (although it can be changed) and, based on this, the annual premium is paid. This goes up every year based on issues such as taxes, the actuarial age of the insured and, in some cases, also the variation in risk.
In the case of decreasing capital life insurance, the premium is calculated based on what remains to be paid. However, as there are some things that vary, especially the age of the insured, it is possible that the premium will not be reduced much or may even increase slightly, since the older you are, the greater the risk.
Also, keep in mind that the life insurance premium is calculated annually (although it can be paid monthly, quarterly or semi-annually). Therefore, the calculation of the premium is made based on the capital that has been amortized the previous year.
Life insurance with decreasing capital Vs. Single premium insurance
In addition to the option of contracting insurance with decreasing capital linked to the mortgage or a loan, there is the option of contracting payment protection insurance with a single premium. In other words, the amount involved in securing the borrowed amount is paid in one go.
Many banks are interested in this type of single-premium payment protection insurance for several reasons:
- In the first place, because the premium is so high that it is usual to include it in the capital and pay it in installments.
- Secondly, because financing the payment of the premium supposes the payment of additional interest. And, the longer the amortization period, the more interest that premium will generate.
- Lastly, because a single-premium payment protection insurance cannot be canceled in the same way as the renewal of risk life insurance.
Is it worth taking out decreasing capital life insurance linked to a loan or mortgage?
Whether it pays to take out decreasing capital life insurance linked to a loan or mortgage depends on many issues, such as age, the insured capital or the repayment period. In general, younger people do find it worthwhile to buy a declining capital life policy. However, we must not lose sight of the fact that from the age of 45 or so, the risk associated with age begins to skyrocket. And it increases a lot every year.
The best thing is to ask them to make a calculation to evaluate what interests us most. In many cases, it is worth taking out risk life insurance that includes not only the amount of the mortgage or loans, but also other debts and additional money to leave an additional cushion for the family and/or heirs.