Understanding Decreasing Term Insurance
Decreasing term insurance is a type of renewable term life insurance where the coverage decreases over the life of the policy at a predetermined rate. Premiums remain constant throughout the contract, with reductions in coverage typically occurring monthly or annually. The terms of decreasing term insurance plans range from 1 year to 30 years, depending on the insurance company’s offerings.
This type of insurance is commonly used to ensure the remaining balance of an amortizing loan, such as a mortgage or a business loan, over time. It differs from level-premium term insurance.
Key Takeaways
- Decreasing term insurance has a death benefit that decreases each year according to a set schedule, with premiums also decreasing over time.
- Commonly used for personal asset protection, decreasing term insurance may also be required by a lender to secure a loan balance until maturity in case of the borrower’s death.
- A decreasing term life policy is often aligned with the amortization schedule of a mortgage.
- Compared to traditional term or permanent life policies, decreasing term life insurance is more cost-effective.
Understanding Decreasing Term Insurance
Term life insurance provides a death benefit for a specific period, with decreasing term insurance featuring a declining death benefit and premiums over time. The amounts are predetermined at the policy’s initiation and can follow a standard schedule or be customized.
The concept behind decreasing term insurance is based on the idea that as individuals age, their liabilities and need for high levels of insurance decrease. Many decreasing term policies, such as mortgage life insurance, are tied to an insured individual’s remaining mortgage balance.
While decreasing term insurance may not meet all life insurance needs, especially for individuals with dependents, standard term life policies offer a death benefit for the contract’s duration.
The primary difference in payment structure between decreasing term insurance and regular term life insurance is that the death benefit decreases over time, unlike other life insurance types.
Benefits of Decreasing Term Life
Decreasing term insurance is commonly used for personal asset protection and by small business partnerships to safeguard against indebtedness related to startup and operational costs.
In the event of a partner’s death, the death benefit from a decreasing term policy can assist in financing ongoing operations or retiring the deceased partner’s portion of the outstanding debt. This protection enables businesses to secure commercial loan amounts affordably.
Affordable than whole life or universal life insurance, decreasing term insurance aligns its death benefit with the amortization schedule of personal debts such as mortgages or business loans.
Unlike policies that accumulate cash value, decreasing term insurance solely provides a death benefit without cash accumulation. Its premiums are modest compared to permanent or temporary life insurance options.
Some lenders may require decreasing term policies to ensure loan repayment if the borrower passes away before the loan matures. For instance, a business borrowing money for expansion may need to take out a decreasing term policy to cover the loan amount.
Example of Decreasing Term Insurance
For a 30-year-old non-smoking male, a $200,000 decreasing term policy lasting 15 years with premiums of $25 per month can be tailored to match a mortgage amortization schedule. The monthly costs for such a plan remain constant despite the increasing risk as the insured ages.
A permanent policy with the same face value could require higher monthly premiums. While universal or whole-life policies maintain fixed death benefits, they may allow reductions in face amounts for policy loans.
Who Might Benefit from Decreasing Term Life Insurance?
Small businesses often benefit from decreasing term insurance to protect against indebtedness related to startup and operational costs. The death benefit proceeds can assist in funding ongoing operations if a partner dies.
Why Might Decreasing Term Life not be the Best Fit for Me?
Decrementing death benefits and potential coverage insufficiencies in the future are significant drawbacks of decreasing term life insurance. While it is cost-effective in the short term, it may leave individuals underinsured in critical situations.
Is Decreasing Life Insurance Cheaper Than Regular Term?
Decreasing life insurance is indeed more affordable than standard term life insurance since both the death benefit and premiums decrease over time.
What Happens at the End of a Decreasing Term Life Policy?
At the policy’s conclusion, the decreasing term life coverage and death benefit terminate.