Decreasing term life insurance provides coverage for a set period of time with a death benefit that decreases over the life of the policy. If your only concern is paying off a mortgage or other big debt, a decreasing life insurance policy allows you to cover these debts without paying for coverage you don’t need.
How does decreasing term life insurance work?
With decreasing term life, you pay a fixed monthly premium throughout your 20 to 30 year term. In exchange for a premium that’s cheaper than a traditional policy, you have a death benefit of up to one million that decreases either monthly or annually over the term of your policy.
Some policies shrink your death benefit by 5% per year over your term. Others shrink substantially every five years — such as a 25-year $500,000 policy with a benefit that decreases by $100,000 every five years.
Decreasing term life is typically tied to a personal debt, such as a mortgage, that also decreases over time. That way, if you die during your term, your family is able to pay off your mortgage with the remaining benefit. Read through your policy documents before signing to make sure you’re aware of any beneficiary requirements, in case you’re required to list your lender as the beneficiary.
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Pros and cons of decreasing term life insurance
Pros
- Less expensive than most policies. Having a decreasing benefit means your monthly premium costs less per month compared to a level term policy of the same value, but your death benefit loses its value over time.
- May not require a medical exam. Depending on your age and insurer, you may not need to take an exam or answer health questions for approval.
- Covers your largest debts. This policy is designed to cover your largest financial obligations if you die during the term.
- OK for small business loans. A decreasing policy between partners in a small business can be used to secure commercial debt and keep the doors open if one partner dies.
Cons
- Loses value over time. You’ll save on premiums, but at a cost of thousands of dollars from your death benefit each year.
- Doesn’t account for future needs. If your financial priorities change, your decreasing benefit may not be enough to help your family cover your debts after you die.
- Limited insurers. Few insurers offer decreasing term life insurance, which can make it difficult to secure a competitive policy.
- Unfavorable policy terms. If you have mortgage protection insurance, which is a type of decreasing term insurance — your beneficiary must be named as your mortgage lender instead of your family. Read your policy carefully to make sure you’re aware of who receives your policy’s payout.
Alternatives to decreasing term life insurance
If your financial priority with life insurance is covering your largest debts after you die, the relatively low cost of a decreasing policy might be worth it while your policy is still worth a lot and covers your largest debts. However, as you get closer to your policy’s expiration date, you’re paying the same premium, but for a significantly lower amount of coverage.
However, a slightly higher premium can buy you a traditional term policy that doesn’t decrease in value over the term:
- Term insurance ladder. Stack multiple term policies to avoid locking in to more insurance than you need. For example, you can buy two policies at once: a 20-year term to fit your mortgage and a 30-year term to take care of your children. Ideally, after 20 years, you’re closer to paying off your mortgage, leaving you for the next 10 years with the cost of only one policy for the coverage you need.
- Level term life insurance. For just a few dollars more each month, you can get the same coverage as your decreasing term policy — but with no decrease in benefits. This ensures your family is covered no matter how your finances evolve.
Bottom line
A decreasing term life insurance policy may sound like an affordable option for covering large debts without paying for insurance you don’t need. Yet by comparing level term policies, you can find a policy with fixed premiums and a consistent death over the life of your term.
Frequently asked questions
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