Many Americans are familiar with traditional term and whole life insurance policies, but may not be knowledgeable about specific types such as decreasing term life insurance.
With standard life insurance, you pay a premium, and if you die while the policy is in force, the stated death benefit is paid out to your beneficiaries.
In most cases, the death benefit remains a constant dollar amount for the term period. This is ideal for those who want to provide income replacement and pay off their family’s future costs, such as a mortgage, car loan, or college tuition for their kids.
However, there are other types of life insurance that can be customized to fit more specific financial needs. For example, some families might want to buy a large death benefit for their early years, but believe they will need less coverage in the future.
What Exactly Is Decreasing Term Life Insurance, Anyway?
Decreasing term insurance is a type of policy where your death benefit decreases monthly or annually (or at some predetermined rate) over the life of the policy, while your premiums remain fixed.
Decreasing term life insurance may be best for individuals needing a term life policy with decreasing death benefits.
Decreasing term insurance could be useful in covering the balance of a mortgage, personal or business loan.
Decreasing term life insurance rates are cheap and affordable, and many of the top life insurance companies offer it as an option.
Alternatively, companies also offer increasing term life insurance, which works the same way by increasing coverage over time. While not as affordable, increasing term life insurance may be an option for families expecting escalating needs.
Why Is Decreasing Term Mortgage Life Insurance Still Sold?
Because decreasing term policies are oftentimes used for those who want to cover the decreasing balance of a mortgage, they may also be referred to as mortgage life insurance.
Mortgage life insurance is not to be confused with PMI, or private mortgage insurance, which is offered through your mortgage lender.
While decreasing term or mortgage life insurance may be pegged to the decreasing value of your mortgage balance, the death benefit will still be paid out to your named beneficiary and not to the bank or lender (which is the case with PMI).
This is an important difference between mortgage insurance and mortgage life insurance because your beneficiaries can still decide what to do with the cash and are not required to pay off the mortgage.
In the case of mortgage insurance, the death benefit is paid directly to the bank and your family has no say, even if other financial needs are more dire.
Why Consider Decreasing Term?
You should buy decreasing term life insurance if:
- You want life insurance to only pay off your mortgage. Buying insurance to cover only your mortgage is not the optimal financial plan, but if you have other resources that will provide your family’s living costs, then decreasing term might be right for you.
- You expect your need for life insurance to decrease over the years. For example, if your children are graduating college or you plan on downgrading your lifestyle and minimizing expenses, decreasing term might be right for you.
- You are purchasing life insurance to cover business or personal loans that you will be paying off in the short-term.
Factors to Consider When Purchasing Term Life Insurance
If you’re shopping for a decreasing term life policy, there are some factors to consider prior to making a purchase.
- Length of the Coverage. One of the most important criteria you will want to determine is how long the term coverage will last before it either expires or converts into some other life insurance policy. Shorter term contracts have cheaper rates, too!
- Type of Policy. You will also want to make sure that your life insurance isn’t just an “accident only” policy and that it will pay out regardless of the type of death that is incurred.
- Graded or Immediate Death Benefits. As part of reading the fine print of any policy, you should inquire as to whether your life insurance death benefit will be paid out immediately, or if it is a graded death benefit. Graded death benefits are typically used for those who have major health issues, and your beneficiary can only obtain a return of premiums paid (aka “a refund”) if you die within the first 1 or 2 years after issuance.
- Conversion Option. Furthermore, you will want to know if you have the option of converting the policy over to whole life insurance at some point in the future. A term life insurance conversion into whole life is a common option companies offer for added flexibility.
Where You May Find Decreasing Term Products
There are several areas in particular where you are more likely to see decreasing term life insurance coverage.
Mortgage redemption riders are a type of decreasing term life policy. The benefit amount of the coverage is designed to pay off the unpaid balance of an individual’s mortgage loan if the insured passes away prior to the loan being paid off.
Here, the amount of the insurance coverage will decrease as the amount of the unpaid balance is reduced over time.
Credit life insurance may also use decreasing term as its primary form of coverage. This type of insurance can protect a person’s dependents in a way where they won’t be saddled with debt if the borrower dies prior to paying off the balance.
In some cases, the purchase of credit life insurance may even be required by a lender before obtaining a loan or credit approval.
Although with credit life insurance the death benefit proceeds do not go to your loved ones, credit life will help in reducing you debts and interest expenses, which can still help in avoiding financial hardship for your survivors.
Is Decreasing Term Insurance The Best For You?
While all situations are different, many people have the need to protect their loved ones through life insurance. In some instances, the financial obligations that you are protecting for may lessen over time.
If that is the case, then a term life insurance policy where the benefits decrease could be a good solution for you.
In sum, decreasing term life insurance can be used to cover and pay off your mortgage or other debts.
It is one of the simplest forms of protection you can purchase – oftentimes without even having an agent involved in the transaction.