Sherilyn Lauren Term life insurance is a suitable option for individuals who seek insurance that will benefit their target years. And since it only lasts for a set amount of time, term insurance offers a few different plans depending on your purpose and need, namely decreasing term life insurance.
This type of insurance differs from others relative to its policy component. So which policy component decreases in decreasing term life insurance?
What is term life insurance?
The keyword term suggests that this type of insurance isn’t boundless. Rather, it covers a specific number of years that primarily provides death benefits.
For instance, premium payments are made for either 10, 20, or 30 years with a death benefit if the policyholder passes away. Then, the insurance company will forward the money from the policy to the designated beneficiaries, which can consist of a family, a charity, or even a business.
The main purpose of obtaining term life insurance is to maintain the financial welfare of the policyholder’s family. Regardless, since the primary benefit is to ensure the financial stability of the policyholder and its beneficiaries, it is often acquired because your mortality risk heightens as you age. Furthermore, term insurance differs according to the insured’s specific factors from which they would most likely benefit.
The following are the types of term insurance that differ in accordance with those variables:
- Level term. The simplest type of term insurance is when the face value and premiums are the same.
- Decreasing term. This type of insurance is based on loans or debts settled throughout the policy. Consequently, the coverage lessens alongside the death benefits.
- Annual renewable term. This provides individuals the option to continue or cancel the coverage to renew their policy without enduring another application and medical examination.
- Return of premium. Your paid premiums are guaranteed to be repaid to you if your policy expires and you haven’t passed away yet.
Even if these term life insurance options differ in function, they still provide certain benefits alongside a set price depending on the policyholder’s profile.
Benefits of Term Life Insurance
Term life insurance serves as protection for you and your family and is substantially different from whole life insurance, making it the cheapest insurance that you can acquire. Moreover, it has fewer financial risks, and you can easily convert it to a more permanent insurance type.
Is term life insurance expensive?
Usually, term life insurance is affordable since it acts within the agreed-upon set number of years. Nonetheless, many factors influence how much it will cost you to have term insurance.
For example, hobbies and age will impact a higher monthly premium as you get older, especially if you are involved in risky pastimes or activities. Other factors, such as family history, health, driving profile, and occupation can also affect your rates. For example, if one immediate family member has a chronic illness, it may be challenging to obtain affordable insurance.
How does term life insurance work?
As with any other insurance, the insurers must assess your information first. Term insurance policies depend on your age, health, and mortality risk. Once it’s settled, monthly payments are expected from the insured until the policy expires.
If the policyholder passes away during the policy’s duration, it will remain in effect so that the insurance company can distribute the finances to the mentioned beneficiaries. However, if the policy ends and the insured hasn’t passed away yet, a renewal is required to extend the insurance, which can be terminated if the insured is no longer interested.
What’s admirable about this insurance type is that the cash benefit is not taxed. Therefore, it is the cheapest insurance to obtain if you’re looking forward to paying off your mortgage, debts, college tuition, or other financial needs that would require temporary insurance.
If you are seeking an even cheaper investment and long-term life insurance is less of a priority, the decreasing term life insurance policy might be the right type for you.
What is decreasing term life insurance?
The basic idea behind this term insurance type is that the term policy matches the debt payoff date. It lasts from five to 30 years and serves the purpose of protecting the insured. Moreover, the policyholder’s death benefit declines over time, at a fixed rate. Therefore, when it expires, no death benefit would remain as it has reached zero.
If you’re a potential applicant for this type of insurance, your main focus — and the insurance company’s concern — is to settle matters that need financial protection. Decreasing term life insurance, or mortgage insurance, is usually cheaper as it lessens over time until your debts are paid. Thus, the policy components that decrease with this type of insurance are the coverage and death benefits.
Having mortgage insurance can work in two ways. First, if the person passes away within the first year of their policy, the beneficiary will receive the full benefit.
However, if it surpasses the third year, the insurers will distribute a portion of the stated amount to the beneficiary. After that time, it will decrease as the years progress until the policy ends.
Even though there is a difference in the amount of death benefit, decreasing term life insurance still has benefits that you might consider helpful and suitable for you.
Debts and Loans Are Prioritized
Although it might be similar to level term insurance in regard to duration, level term insurance has a fixed amount of premium and death benefits. In contrast, decreasing term life insurance eventually changes.
This is because monthly premiums are based on any loans or debts that you may have. So if you are seeking insurance that prioritizes these financial matters, then decreasing term life insurance is more effective and affordable, especially if you believe that life insurance is less of a need for you and you have other financial resources to support your family.
How common is decreasing term life insurance?
Two of the areas in which this insurance type is more prevalent include mortgages and credit. The insured will still have their mortgage loan paid off with a mortgage, especially if they pass away before the policy’s expiration.
The policy component that decreases in decreasing term life insurance is the death benefit. This type of term insurance is suitable for people who want to focus on financial obligations, like loans and debts, minus the hassle of actually paying them without insurance. It lasts for a specified amount of time, typically ranging from five to 30 years.
On the other hand, credit life insurance doesn’t primarily focus on mortgage loans. Instead, it can also involve debts or loans that the insurance company will handle if the policyholder passes away before completely paying them off during the duration of the insurance.
However, the death benefits do not exactly come from the insurance as one would expect. As defined in this context, death benefits indicate that the family or concerned beneficiaries will have a lesser financial burden in dealing with the insured’s loss. They won’t have to endure the burden of handling the insured’s unpaid debts or loans at their own expense.
What to Consider in Decreasing Term Life Insurance
Because it is a term policy, you must first assess your financial priorities and how urgently you need to address them. The shorter the term policy, the cheaper it will be, but it will still depend on your situation.
Next, you should consider the death benefit offered. Graded death benefits are terms for those insured who die of illnesses or accidents.
Lastly, if your decreasing term life insurance gave you the option to convert it into life insurance, it is much more practical.
Term insurance serves the various needs of different people. In the context of protection, decreasing term life insurance is a viable solution.
To know if decreasing term insurance benefits you best, fully assess your goals and objectives for acquiring insurance. Term insurance provides you a targeted date for succeeding with your financial goals, even in unprecedented circumstances.
References:
- https://www.guardianlife.com/life-insurance/death-benefits
- https://corporatefinanceinstitute.com/resources/knowledge/other/decreasing-term-insurance/
- https://www.investopedia.com/terms/d/decreasing_term_life.asp#:~:text=What%20Is%20Decreasing%20Term%20Insurance,typically%20occur%20monthly%20or%20annually
- https://www.bankrate.com/insurance/life-insurance/decreasing-term-insurance/
