Term assurance providers are attempting to revive the market by launching products that offer more flexibility on premiums – and added scope for policyholders to protect against sharp rises in mortgage rates.

Term assurance is the name for life cover that is in place for a set term, most often the length of a repayment mortgage.

The policies pay a cash lump sum, typically covering the outstanding mortgage debt, if the borrower dies within the term of the policy.

But sales of the cover have tailed off in the downturn, alongside the sharp slump in mortgage lending – prompting some providers to review their products.

Now, the country’s leading provider of these policies is poised to launch an expanded decreasing term assurance product that will allow borrowers to make savings on their premiums.

“Mortgage decreasing term assurance is designed to cover a mortgage debt and the sum assured decreases over the term of the policy, roughly in line with the mortgage as the capital is repaid,” explains Legal & General (L&G).

“Previously, L&G based its pricing on one interest rate, but now there will be four to allow advisers more flexibility according to their clients’ requirements, budget and appetite for risk,” the company says.

L&G currently bases its pricing on a 10 per cent interest rate. This does not correlate with the actual base rate but reflects the insurer’s need to budget for a future payout of both the outstanding capital plus accrued interest elements of a mortgage, with the latter a variable.

But, from next month, L&G customers taking out cover with a financial adviser will have the flexibility of obtaining a quote based on a choice of four rates: 7, 8, 10 and 12 per cent.

The principle is that a lower interest rate will require lower premiums but a higher interest rate will offer more cover and a bigger buffer against future movements in the base rate as the sum assured does not decrease as quickly (see table).

“Some clients want cheap monthly premiums and will be happy not to hedge against possible high interest rates in the future,” says Bonnie Burns, L&G’s protection marketing director.

“Other clients may want to choose a higher interest rate on which their cover is based and will be happy to pay more for that peace of mind,” she adds.

L&G’s initiative came as other providers also revamped the cover that is often sold with term assurance.

Aviva, the country’s largest insurer, last month increased the maximum sum insured on its critical illness policies to £2m. It also extended the terms for which policies are available and widened the illnesses covered for all new policies. Critical illness cover can be included in mortgage term assurance and will pay a lump sum on the diagnosis of a range of conditions.

“As the housing market picks up, more consumers will be looking to take out a mortgage and a financial protection policy to ensure their debts are properly covered,” says Matt Morris, senior policy advisor with LifeSearch, the specialist protection independent financial advisers.

“This initiative [L&G] offers a variety of interest rates and can give consumers the type of flexibility they need.”

However, L&G is not the first to offer interest rate flexibility on its decreasing term assurance.

Bright Grey customers with mortgages of, for example, £500,000 could make savings of more than £200 a year by choosing its lowest interest rate of 0 per cent.

Even so, some in the industry believe that flexible in-house interest rates is not the way forward.

“There is a risk of customers not getting their mortgage debt covered if you give them the option to choose their own interest rate,” says Friends Provident, which uses a single interest rate of 8 per cent.

“We set out interest rates on the basis of what is appropriate at the time and we believe it is a prudent approach.”

Aviva, which uses one rate of 5 per cent, says more choice will add complexity to the sale process. “Our approach now is very much to keep things simple,” it says.

Customers often opt for decreasing term assurance as it is less expensive than a level term policy, where the lump sum is agreed at the outset.

But price should not be the sole focus for protection products.