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.
While many Americans are familiar with traditional term and whole life insurance policies, they may not be knowledgeable about other options such as decreasing term life insurance.
These types of life insurance 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.
In this article, we will give you all the information you’ll need to decide if decreasing term life insurance is right for you.
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Decreasing term life insurance may be best for individuals needing a term life policy with decreasing death benefit amounts.
Decreasing term insurance could be useful in covering the balance of a mortgage, personal, or business loan.
Decreasing term life insurance rates are generally 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.
Because decreasing term policies are oftentimes used for those who want to cover the decreasing balance of a mortgage, these policies 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.
This is an important distinction to understand because of who gets paid the benefit, how much, and how the premiums change.
Here’s a breakdown:
|PMI||Mortgage Balance||Cost Per Thousand||Lender|
In the case of mortgage insurance, your payment is determined as a percentage of the loan amount (cost per thousand), and can usually be removed or refinanced away when you have 20% equity in your home.
But the big thing to note is the death benefit is paid directly to the bank and your family has no say.
You should buy decreasing term life insurance in the following circumstances:
- Mortgage-only Payoff: . You want to make sure your mortgage will be paid off and you have other resources that will provide for your family’s living costs.
- Decreasing Need: You expect your need for life insurance to decrease over the years. For example, if your children are graduating from college or you plan on downgrading your lifestyle and minimizing expenses.
- Loan Coverage: You are purchasing life insurance to cover business or personal loans that you will be paying off in the short term.
It can be, though most families opt for a level term policy.
But if you know you could benefit from a decreasing term life policy, there are some factors to consider prior to making a purchase:
- Length of Coverage: How long will the term coverage last before it either expires or converts into some other life insurance policy? Keep in mind that shorter term contracts have cheaper rates!
- Type of Policy: 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.
- Type of Death Benefit: Will your death benefit be paid out immediately, or is it a graded death benefit? Graded death benefits are typically used for those who have major health issues, because 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: Does your policy have the option to convert 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.
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 a 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 your debts and interest expenses, which can still help in avoiding financial hardship for your survivors.
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.
It is one of the simplest forms of protection you can purchase—oftentimes without even having an agent involved in the transaction.