Decreasing term life insurance features term coverage that reduces in benefits over the life of the policy. The policy’s payout continues to decrease until the end of the designated coverage period, or the policy pays out.
Decreasing term life insurance is generally used to cover debt. For instance, the amount owed on a mortgage or other loan. Such life insurance policies are set up to simultaneously decrease in value as debt is paid down and reduces.
What is Decreasing Term Life Insurance?
A decreasing term life insurance policy is set up so that the premium remains stable, yet the payout decreases over a set period. For instance, if you wish to ensure that your home’s mortgage is paid in the event of your untimely death, a decreasing term life insurance policy may work well.
Decreasing term life insurance policies are designed to decrease in payout amount in tandem with a decrease in the mortgage or other debt as you make payments. That way if you pass away before paying off your debt, the policy will kick in and cover the remainder due. Decreasing term life insurance policy benefits generally drop once a year.
Unlike whole or universal life insurance policies, decreasing term insurance only provides a death benefit. There is no cash accumulation like you will find with a whole life insurance policy. Because it is a straightforward payout product, decreasing term life insurance features modest premiums.
What Decreases in Decreasing Term Insurance?
Payments remain the same with decreasing term life insurance. What lowers are the benefits. According to a set rate, the payout benefit amount decreases each year. This is predetermined when you purchase the policy. A common decrease amount is 5 percent per year. The closer the policy is to term, the less the payout will be.
Should I Buy Level Term or Decreasing Life Insurance?
Whether you purchase decreasing term life insurance or level term life insurance, it depends on your life circumstances and financial responsibilities.
Decreasing term life insurance makes sense when:
- You have a family and wish to protect certain assets, such as your home, for which you still owe a considerable amount of money. (For instance, you may have an interest-only mortgage.) Decreasing term life insurance can help protect your family from loss of the home or other assets, should you pass away.
- You are concerned about your family becoming indebted in the event of your death with financial responsibilities they are unable to handle.
- Your family has a source of income for living expenses, should you pass away.
- You have budgetary constraints. Decreasing term life insurance tends to be less expensive.
- You have a business partner or partners who would be left with a large debt should you die. Decreasing term life insurance can cover business debt. The payout could enable your partner to pay off any remaining debt and close the business or continue operations.
- Your financial obligations will decrease over the policy’s term. For instance, by the end of the loan, your children will be grown and taking care of themselves financially.
Consider level term life insurance if:
- You want the same payout no matter when or if your family cashes out. This could occur two years after the policy starts or two weeks prior to its end. The only way to change the payout is to change the policy.
- You wish to ensure a set amount of money for your loved ones upon your death. For instance, you may want your home’s mortgage paid off after your death and your spouse to receive additional funds for living expenses. Decreasing term life insurance generally doesn’t offer such latitude.
- You want to help guarantee a secure standard of living for your family.
- You are prepared to pay a higher premium. Level term life insurance is usually more costly than decreasing term life insurance.
- Your financial obligations will remain the same or increase over the life of the insurance policy. Level term life insurance is well-suited to grow with you as your financial needs increase.
How Does Decreasing Term Life Insurance Work?
Decreasing term life insurance decreases in benefits over time. Generally, the decrease occurs yearly, but some policies decrease monthly. A common reduction rate is 5 percent per year.
For instance, if you bought a 20-year decreasing term life insurance with a payout of 5 percent, the first year your beneficiary would get the entire $200,000. However, as each year passes, the payout amount decreases. In five years, the $200,000 payout will have reduced to 25 percent of the original total. If you die at that point, your heirs will receive $150,000.
Though decreasing term life insurance is designed to work in conjunction with the payoff of certain loans, your beneficiary isn’t required to use the money for any specific purpose. If you pass away, the money in the policy will be distributed to your chosen beneficiary. He or she would then be able to pay off your mortgage or decide to do something else with the funds. For instance, your beneficiary may decide to sell the family home, rather than stay. Or the beneficiary may be able to pay the monthly mortgage on the family home without assistance and decide to save the money for future use.
Benefits of Decreasing Term Life Insurance
Several advantages to decreasing term life insurance exist. One of the top considerations is affordable coverage. If you’ve been wondering how you can afford life insurance so that you can safeguard your family’s future should you meet an untimely death, this is an ideal option.
Decreasing term life insurance provides you an ideal way to cover your temporary needs. For instance, this type of coverage is ideal when you are just starting out as a family. Such policies provide coverage when you need it most. Decreasing term life insurance also helps you ensure that your loved ones can pay off debts when you’re gone. Knowing this is likely to give you peace of mind.
Disadvantages of Decreasing Term Life Insurance
The biggest drawback of decreasing term life insurance is the fact that you pay the same premium for the life of the policy, despite decreasing coverage. This is offset by the fact that the premium is generally the least expensive you will find for life insurance. Level term life insurance tends to be more expensive. Whole life insurance is substantially more costly than decreasing term life insurance.
Decreasing Term Life Insurance Versus Mortgage Life Insurance
While a decreasing term life insurance payout can be used to pay off your mortgage in the event of your death, it doesn’t have to be used for that purpose. You can name anyone as your beneficiary, and that person can use the funds as he or she wishes. The payout is distributed directly to your beneficiary.
With mortgage life insurance, the mortgage company is the beneficiary. The policy is designed for one purpose, which is to pay off the balance of your mortgage should you die. At payout, the money goes directly to the mortgage company to pay off your loan.
Mortgage life insurance policies are sold through mortgage lenders and banks. The payout of these policies matches your mortgage balance. In that way, these plans are similar to decreasing term life insurance. The payout amount decreases over time as you pay your mortgage down.
The top benefit of mortgage life insurance versus decreasing term life insurance is the convenience. Upon your death, the payment goes directly to the mortgage company. Your heirs don’t have to initiate the payoff, and the home is theirs outright. This immediately removes the burden of a mortgage for those you leave behind.
Who Sells Decreasing Term Life?
Decreasing term life insurance isn’t as available as level term life insurance, but some insurance companies do provide such plans. You’ll find that various online life insurance carriers offer the coverage. You can also consult with an insurance broker regarding locating decreasing term life insurance policies for comparison.
When reviewing decreasing life insurance coverage possibilities, in addition to considering price, look for coverage that extends beyond the life of the debt you’re planning to cover. This gives you some latitude should unexpected financial situations arise that cause you to get off course during repayment.
Also check with the insurance company or broker if you can add desired riders to your policy. For instance, a rider that protects you financially due to a terminal illness may be a beneficial addition to your policy.
Decreasing term life insurance is a versatile product that can help you ensure that your family and assets remain protected and intact should something happen to you. Consider if such a policy could potentially benefit you and your loved ones.
