What Is Decreasing Term Insurance?
Decreasing term insurance is a type of renewable term life insurance with coverage decreasingover the life of the policyat a predetermined rate. Premiums are usually constant throughout the contract, and reductions in coverage typically occur monthly or annually. Terms range between 1 year and 30 years depending on the plan offered by the insurance company.
Decreasing term life insurance is usually used to guarantee the remaining balance of an amortizing loan, such as a mortgage or business loan over time. It can be contrasted with level-premium term insurance.
Key Takeaways
- Decreasing term insurance features a death benefit that gets smaller each year, according to a predetermined schedule that also sees premiums decrease over time.
- Decreasing term insurance is often purchased to provide personal asset protection.
- It may also be required by a lender to guarantee the remaining balance of a loan until its maturity in case the borrower dies.
- A decreasing term life policy is very similar and may mirror the amortization schedule of a mortgage.
- Decreasing term life insurance is less expensive than traditional term or permanent life policies.
Understanding Decreasing Term Insurance
Term life insurance is a form of coverage that provides a death benefit for only a certain length of time. For instance, a 20-year term life insurance policy would feature level premiums and the same death benefit over the course of its term. Decreasing term insurance instead features a declining death benefit over time, along with decreasing premiums. These amounts will be set to a schedule when the life insurance policy is purchased and may conform to a standard schedule or be customized between the insurer and the insured.
The theory behind decreasing term insurance holds thatwith age, certain liabilities, and the corresponding need for high levels of insurance decreases. Numerous in-force decreasing term insurance policies take the form of mortgage life insurance, which affixes its benefit to the remaining mortgage of an insured’s home.
Alone, decreasing term insurance may not be sufficient for an individual's life insurance needs, especially if they have a family with dependents. Affordable standard term life insurance policies offer the security of a death benefit throughout the life of the contract.
The payment structure is the primary way this type of insurance is different from regular term life. The amount in the death benefit goes down, unlike other forms of life insurance.
Benefits of Decreasing Term Life
The predominant use of decreasing term insurance is most often forpersonal asset protection. Small business partnerships also use a decreasing term life policy to protect indebtedness against startup costs and operational expenses.
In the case of small businesses,if one partner dies, the death benefit proceeds from the decreasing term policy can help to fund continuing operations or retire the percentage of the remaining debt for which the deceased partner is responsible. The security allowsthe business to guarantee commercial loan amounts affordably.
Decreasing term insurance is a more affordable option than whole life or universal life insurance. The death benefit is designed to mirror the amortization schedule of a mortgage or other personal debt not easily covered by personal assets or income, like personal loans or business loans.
Decreasing term insurance allows a pure death benefit with no cash accumulation, unlike, for example, a whole life insurance policy. As such, this insurance option has modest premiums for comparable benefit amounts to either a permanent or temporary life insurance.
Decreasing term policies are sometimes required by certain lenders to guarantee that the loan will be repaid in the event that the borrower dies before the loan matures. For instance, a small business may borrow $500,000 from a bank to expand, with $50,000 to be repaid each year for 10 years. They may ask the business owner to take out a decreasing term policy beginning in the amount of $500,000 and also reducing by $50,000 each year for ten years.
Example of Decreasing Term Insurance
For example, a 30-year-old male who is a non-smoker might pay a premium of $25 per month throughout the life of a 15-year $200,000 decreasing term policy, customized to parallel a mortgage amortization schedule. The monthly cost for the level-premium decreasing term plan does not change. As the insured ages, the risk of the carrier increases. This increase in risk warrantsthe declining death benefit.
A permanent policy with the same face amount of $200,000 could require monthly premium payments of $100 or more per month. While some universal or whole-life policies allow reductions of face amounts when the insured uses the policy for loans or other advances, the policies frequently hold fixed death benefits.
Who Might Benefit from Decreasing Term Life Insurance?
Small businesses sometimes find it useful to protect indebtedness against startup costs and operational expenses. For example, if one partner dies, the death benefit proceeds from the decreasing term policy can help to fund continuing operations or retire the percentage of the remaining debt for which the deceased partner is responsible. The protection also allowsthe business to guarantee commercial loan amounts affordably.
Why Might Decreasing Term Life not be the Best Fit for Me?
The main drawback is the death benefit declining over time, which is of course why it costs less than standard term life or other policies. Also, should something happen down the road, decreasing term life may not provide the coverage needed. Saving a few dollars in the short term may leave you uncovered should a future event occur.
Is Decreasing Life Insurance Cheaper Than Regular Term?
Yes, because as the death benefit decreases over time, so too do the corresponding premiums.
What Happens at the End of a Decreasing Term Life Policy?
At the end of a decreasing term life policy, it terminates along with the death benefit coverage.
FAQs
Decreasing term insurance allows a pure death benefit with no cash accumulation, unlike, for example, a whole life insurance policy. As such, this insurance option has modest premiums for comparable benefit amounts to either a permanent or temporary life insurance.
What is an example of decreasing term insurance? ›
Example:You take out a $300,000, 30-year decreasing term life insurance policy to help your spouse continue making your mortgage payment in case you pass away unexpectedly. The death benefit is set to decrease by 3.33% per year for the life of the policy.
What are the disadvantages of decreasing term insurance? ›
The drawbacks of decreasing term life insurance
- It offers the lowest overall coverage, especially in the later years of a policy.
- It may not cover anything but your mortgage, leaving your loved ones at risk of covering to other outstanding debt and funeral costs.
Decreasing term insurance provides aid for one's beneficiaries to settle debt obligations should anything happen. Examples of debts that can be covered with decreasing term insurance include personal loans, business loans, loans for vehicles (or auto loans), and mortgage loans.
What are the pluses and minuses of term life insurance? ›
Term Life Insurance Pros: It's customizable, specific to your timeline, and usually costs less than whole life insurance. Term Life insurance Cons: If you outlive the term length, your coverage will end and you won't receive any benefits.
What are the benefits of decreasing life insurance? ›
Benefits of decreasing life insurance
- It's typically cheaper than level term insurance.
- Your cover amount stays broadly in line with your debt amount, so you don't pay for more cover than you need.
- It's a good option for repayment mortgages or other long-term loan amounts that go down over time.
What is decreasing term life insurance? Decreasing term life insurance is a type of life insurance policy that pays out less over time. It's often used to cover the balance of a repayment mortgage, because the total balance of the mortgage decreases over time and will be paid off in full at the end of the term.
What is the benefit of decreasing term assurance? ›
Decreasing Term life insurance is a type of policy that pays out less as time goes on. So, if you pass away near the beginning of the term, your loved ones will receive more money than if you pass away nearer to the end.
What is decreasing term insurance often used to? ›
Decreasing term life insurance is designed to provide coverage for a specific period, but the benefit amount decreases over time. It's often used to cover a specific financial obligation, such as a mortgage or other type of loan, with debt that reduces as it's paid.
Does decreasing term life insurance have cash value? ›
No cash value: Unlike some types of permanent life insurance policies, decreasing term insurance policies usually do not accumulate cash value over time. The policy's primary purpose is to provide coverage for the specified financial obligation.
Decreasing Life Insurance is designed specifically to help protect a repayment mortgage, so the amount of cover reduces roughly in line with the way a repayment mortgage decreases. Just remember that life insurance is not a savings or investment product and has no cash value unless a valid claim is made.
Can you get decreasing term life insurance? ›
Decreasing term policies tend to have the lowest premiums of the three main types of term life cover. This type of policy is an option if you want to invest in life cover but need to keep your monthly premiums to a minimum.
What is a decreasing term policy face amount? ›
With decreasing term life insurance, your policy's face value shrinks over time until your term expires (though premiums may stay the same). This type of insurance is typically tied to a debt that decreases over time, such as a mortgage.
What is the best rated life insurance for seniors? ›
6 Best Life Insurance Companies for Seniors
- Fidelity Life: Our top pick for seniors.
- MassMutual: Our pick for guaranteed issue coverage for seniors.
- State Farm: Our pick for customer satisfaction.
- Northwestern Mutual: Our pick for a personalized experience.
- Mutual of Omaha: Our pick for accelerated death benefits.
The pros and cons of term and whole life insurance are clear: Term life insurance is simpler and more affordable but has an expiration date and doesn't include a cash value feature. Whole life insurance is more expensive and complex, but it provides lifelong coverage and builds cash value over time.
What policy pays on the death of the last person? ›
Survivorship life insurance insures two people and only pays out the death benefit after both have passed away. It's often purchased by a couple as a means of leaving money to their children, estate planning, leaving a sizeable legacy, or funding a support system for a dependent who may require lifetime care.
What are the types of decreasing life insurance? ›
Both mortgage protection insurance and credit life insurance are variations of decreasing term life insurance. These policies cover your mortgage or other personal loan balance if you die before it's paid off. The death benefit typically goes to the lender, meaning your loved ones won't get any money.
What is an example of term insurance? ›
Example of Term Life Insurance
He buys a 10-year, $500,000 term life insurance policy with a premium of $50 per month. If George dies within the 10-year term, the policy will pay George's beneficiary $500,000. If he dies after the policy has expired, his beneficiary will receive no benefit.
What is an example of increasing term insurance? ›
With increasing term, your coverage amount will rise by increments throughout the policy term, sometimes along with your premium rates. For example, if you choose a $250,000 policy with a 5% increasing term, your policy face amount will be $312,500 in five years.
What is a common use for decreasing term life insurance quizlet? ›
(A common use for decreasing term life insurance is to cover a home mortgage.) (Premium payments for a Universal life policy are NOT used for separate account investments.) 15.
