Decreasing term life insurance is designed to provide coverage for a specific period, but the benefit amount decreases over time. It's often used to cover a specific financial obligation, such as a mortgage or other type of loan, with debt that reduces as it’s paid.
What is decreasing term insurance?
Imagine you have a financial responsibility, like a mortgage or loan, that you're paying off over time. You want to make sure your loved ones won't be burdened with that debt if something happens to you. That's where decreasing term life insurance comes in.
Decreasing term life insurance is like a safety net for your family. You buy this type of insurance for a specific period, and the coverage amount gradually goes down over that time, just as your debt is decreasing. You pay a regular premium, and if you pass away during the policy term, your family gets a payout to help cover remaining debt.
It’s term life, which is different from whole life
While there are countless variations on life insurance, coverage amounts, and the add-ons or “riders” you can choose, every policy generally falls into one of two types:
Term life insurance provides coverage for only a certain period, usually between five and 30 years. It is generally more affordable, but your rates will likely change at the end of the agreed-upon period if you wish to continue coverage.
Permanent life insurance, such as whole life, offers guaranteed lifetime protection with premiums that never increase. It can also accumulate cash value, which can be withdrawn or borrowed against during your lifetime.
Your coverage goes down over time
Typical term life is level, meaning it provides the same life insurance benefit throughout the entire period covered. If you pass away in year five or year 25 of a policy, your beneficiaries will receive the same amount. Decreasing term life, as the name suggests, offers gradually less protection over time. For that same 30-year policy, your beneficiaries may get $100,000 in year five, but only $25,000 in year 25. This may not seem especially beneficial, but there are some important use cases for decreasing term life that we’ll cover shortly.
Decreasing term insurance premiums are usually lower
Premiums for decreasing term life can often look very attractive, since they are usually more affordable than other types of insurance. However, it’s important to realize that the value of your policy is decreasing as time goes on, so you may be paying less, but you’re also getting less. Depending on how you set up the policy at the beginning, you might have the same premium throughout the life of the policy, or your premium might decrease in future years as the coverage decreases.
Uses for decreasing term policies
While decreasing term life can be purchased for any reason, there are a few common scenarios in which it is widely considered more appropriate:
Mortgage decreasing term life insurance
One of the most common uses for decreasing term life insurance is to cover a mortgage. Often, milestones like buying a home can change your financial picture, and that is a great time to reassess your life insurance needs. If your spouse or family would have trouble with the monthly payments without your income, decreasing term life can ensure that they are able to pay off the outstanding debt and keep the home, no matter what happens. As the amount you owe on the mortgage loan goes down, the coverage can be amortized to decrease in concert and match it, keeping your premiums more affordable while still protecting your family’s home.
Related: Mortgage protection with life insurance
Small-business decreasing term life insurance
Decreasing term life is often used by small-business partners to ensure continuity, cover debts, and continue operations should a partner pass away. This can be an extremely important part of an overall business succession plan to guarantee the survival of the business through a difficult transition period.
Other uses for decreasing term life
Many people also use decreasing term life to cover other types of loans, such as car or personal loans, or to replace an income stream such as a pension or annuity. Basically, any asset that your family depends on, and that might become financially burdensome if your income is taken out of the picture, can create a scenario that would benefit from decreasing term life insurance.
Is decreasing term life right for you?
If you have a particular debt for which your risk exposure will decrease over time and you want to protect your family should something happen to you, then decreasing term life is a great solution. If you don’t have a specific mortgage or other asset you’re protecting, you’d likely be better off with level term life insurance or whole life insurance. These other options can provide a steadier and more reliable benefit should you pass away. Compare types of term life insurance, or connect with an agent to go over your options.
