What Is Decreasing Term Insurance?

What Is Decreasing Term Insurance?

Let me explain decreasing term insurance to you directly: it's a type of renewable term life insurance where the coverage amount decreases over the policy's life at a set rate. You'll usually pay constant premiums throughout the contract, with the coverage reductions happening monthly or annually. The terms can range from 1 to 30 years, depending on what the insurance company offers.

I see it most often used to secure the remaining balance of an amortizing loan, like a mortgage or a business loan, as time goes on. You can contrast this with level-premium term insurance, where everything stays the same.

Key Takeaways

Here's what you need to know assertively: decreasing term insurance has a death benefit that shrinks each year based on a fixed schedule, and premiums often decrease too. People buy it mainly for personal asset protection. Lenders might require it to cover a loan's remaining balance until maturity if the borrower dies. It closely resembles a mortgage's amortization schedule. Overall, it's cheaper than standard term or permanent life policies.

Understanding Decreasing Term Insurance

Term life insurance gives you a death benefit for a specific period. For example, a 20-year term policy keeps premiums and the death benefit level throughout. But with decreasing term insurance, the death benefit declines over time, and so do the premiums. These are scheduled when you buy the policy, either standard or customized between you and the insurer.

The idea is that as you age, some liabilities decrease, so you don't need as much insurance. Many policies act as mortgage life insurance, tying the benefit to your home's remaining mortgage. By itself, it might not cover all your needs, especially if you have a family depending on you. Standard term policies are affordable and provide steady death benefits for the whole term.

Important Note on Payment Structure

The key difference from regular term life is the payment structure: the death benefit decreases, unlike in other life insurance forms.

Benefits of Decreasing Term Life

The main benefit you'll find is for protecting personal assets. Small business partnerships use it to cover debts from startup and operations. If a partner dies, the policy's proceeds can fund ongoing operations or pay off the deceased's share of the debt. This lets the business secure commercial loans affordably.

It's more affordable than whole or universal life insurance. The death benefit matches a mortgage or other debt's amortization, which personal assets or income might not cover easily, like personal or business loans. It offers a pure death benefit without cash buildup, unlike whole life, so premiums are modest compared to permanent or other temporary insurance.

When Lenders Require It

Sometimes lenders mandate decreasing term policies to ensure loan repayment if you die before maturity. Take a small business borrowing $500,000 from a bank for expansion, repaying $50,000 yearly over 10 years. They might require a policy starting at $500,000, decreasing by $50,000 each year for a decade.

Example of Decreasing Term Insurance

Consider this example: a 30-year-old non-smoking male might pay $25 monthly for a 15-year $200,000 decreasing term policy tailored to a mortgage schedule. The premium stays level. As you age, the insurer's risk rises, justifying the declining benefit. A permanent policy with the same $200,000 face value could cost $100 or more monthly. Some whole-life policies allow face amount reductions for loans, but they usually keep fixed benefits.

Who Might Benefit from Decreasing Term Life Insurance?

Small businesses often benefit by protecting against startup and operational debts. If a partner dies, proceeds can sustain operations or clear the deceased's debt portion, allowing affordable loan guarantees.

Why Might Decreasing Term Life Not Be the Best Fit for You?

The biggest downside is the declining death benefit, which is why it's cheaper than standard term or other policies. If something happens later, it might not provide enough coverage. Saving money now could leave you exposed in the future.

Is Decreasing Life Insurance Cheaper Than Regular Term?

Yes, because the death benefit and premiums decrease over time.

What Happens at the End of a Decreasing Term Life Policy?

At the end, the policy terminates, and so does the death benefit coverage.