Decreasing Term Insurance in Australia: Benefits, Costs & 2025 Trends

As home loan balances drop, shouldn’t your life insurance premiums? Decreasing term insurance might be the flexible, cost-effective solution Australians are embracing in 2025.

What is Decreasing Term Insurance?

Decreasing term insurance is a life insurance policy where the sum insured reduces over time, typically matching the outstanding balance of a mortgage or personal loan. Unlike standard term life insurance, which keeps your cover level for a set period, decreasing term aligns its payout with your declining debt.

It’s designed for those who want to ensure their debts—especially a home loan—are cleared if they pass away, without paying for excess coverage as the years go by. With the Reserve Bank of Australia maintaining a cautious outlook and borrowers seeking sharper ways to manage household budgets, this insurance model is finding new relevance in 2025.

How Does Decreasing Term Insurance Work?

When you take out a decreasing term policy, you select a period (often 10 to 30 years) and an initial sum insured—usually equal to your mortgage or loan amount. Each year, the insured amount drops, typically in line with your expected loan balance. If you die during the policy term, your beneficiaries receive the current sum insured, which should be enough to pay off the remaining debt.

• Premiums: Usually fixed, but the cover amount falls over time.

• Purpose-built: Ideal for covering specific debts that reduce over time, such as home loans, investment property loans, or business loans.

• Affordability: Because the risk to the insurer decreases each year, premiums are generally lower than for level term insurance.

For example, if you have a $600,000 mortgage in 2025 and take out a 25-year decreasing term policy, your cover will gradually reduce to zero as your mortgage is paid off. Should something happen to you in year 10, the payout matches your remaining mortgage balance, ensuring your family isn’t left with a financial burden.

2025 Updates: Why Decreasing Term Insurance is Gaining Popularity

This year, several factors are driving renewed interest in decreasing term insurance:

• Rising Household Debt: ABS data shows household debt-to-income ratios remain high. Australians are seeking smarter ways to protect their assets without over-insuring.

• Regulatory Focus on Underinsurance: APRA has flagged underinsurance as a systemic risk, prompting lenders to promote more tailored coverage options to borrowers.

• Digital Innovation: Many insurers now offer online tools that let you link your policy directly to your mortgage balance, automatically adjusting cover each year—reducing admin headaches.

• Taxation and Estate Planning: In 2025, payouts from decreasing term insurance remain tax-free to beneficiaries, making it an efficient estate planning tool for families with large debts.

Some lenders are even bundling decreasing term insurance as part of home loan packages, offering discounts for borrowers who take up both products.

Is Decreasing Term Insurance Right for You?

This insurance model isn’t for everyone. Here’s when it makes sense—and when it might not:

• Best suited for: People with mortgages or loans who want to ensure their debts are cleared if they die, without paying for more cover than needed.

• Not ideal for: Those wanting to leave a fixed lump sum legacy or who have complex estate planning needs beyond debt protection.

In 2025, many Australians are refinancing to cope with fluctuating interest rates. Decreasing term insurance can be adjusted if you make extra repayments or restructure your loan—so your cover always fits your real-life balance.

Example: Jane, a Sydney homeowner, refinances her $500,000 mortgage to a lower rate. She updates her decreasing term policy online, reducing her premiums and keeping her cover in sync with her new repayment schedule.

Key Takeaways: The Future of Decreasing Term Insurance

• It’s a cost-effective, targeted solution for Australians with reducing debts.

• 2025 has seen digital innovation and regulatory encouragement boost its appeal.

• It works best for those seeking simple debt protection, not broader wealth transfer goals.