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Decreasing Term Life Insurance: Is It a Good Choice?

What is Decreasing Term Life Insurance?

Decreasing term life insurance is a type of insurance where the premiums stay the same, but the death benefit decreases over time. People who opt for decreasing term life insurance policies usually do it to cover a mortgage or other financial obligation. The death benefit decreases as the amount of money you owe on the mortgage decreases. 

For example, Tim buys a $200,000 decreasing term life insurance policy the year he buys his home. After 5 years, the death benefit might be only $160,000, but hopefully Tim only owes $160,000 on his home. The decreasing term life insurance policy would pay off the mortgage so that Tim’s beneficiaries can stay in their home if Tim passes away. Eventually, the death benefit on the policy is zero, but your home is paid off. 

You can get a decreasing term life insurance policy for any term you want—terms can be as few as five years and as long as thirty years. There is no cash value associated with decreasing term life insurance, as there is with whole life insurance. On the other hand, decreasing term life insurance is much less expensive.

>>MORE: Term Life Insurance: How It Works and Its Costs?

Pros and Cons of Decreasing Term Life Insurance

Pros:

  • Less expensive than level term insurance
  • Corresponds to large debts, such as a mortgage or business startup costs
  • Beneficiaries will be able to pay off the mortgage and stay in their home with the death benefit
  • As you age, your need for insurance goes down

>>MORE: Can I Sell My Term Life Insurance Policy for Cash? and What Do I Need to Do to Sell My Term Life Insurance Policy?

Cons:

>>MORE: Differences Between Term Life and Whole Life Insurance

Decreasing Term Life Insurance vs. Level Term Life Insurance

Level term life insurance is where the premiums stay the same, as does the death benefit. For example, Mike takes out a $100,000, twenty-year level term policy. His premiums are $75 a month. After eighteen years, Mike passes away. His beneficiaries receive the $100,000 death benefit. 

If Mike had chosen a decreasing term life insurance policy, he could still get a twenty-year term and at the start of the policy the death benefit would be $100,000. His premiums are $40 a month. If Mike dies the first year he has the policy, his beneficiaries get $100,000. However, Mike is in fairly good health and lasts until year 18. The death benefit might only be $10,000 by then. 

Who is Decreasing Term Life Insurance For?

Decreasing term life insurance is most often used to correspond with a mortgage amortization schedule. The death benefit decreases with the amount of money you owe on the mortgage. This way, if you die while the policy is still in effect, you have enough to pay off the house. 

You may also have heard of Private Mortgage Insurance (PMI), but this is insurance that benefits the bank, not you. If you don’t put down a certain amount on a house (usually 20%), the bank considers you high-risk and tacks this insurance onto your mortgage in case you default. Decreasing term life insurance, on the other hand,  protects your dependents. 

Decreasing term life insurance doesn’t have to correspond to a mortgage. It can also be used to cover any large personal loan, such as the cost of starting a business. 

Another benefit to decreasing life insurance is that as people age, they tend to need less life insurance. Hopefully, they’ve saved some money, their children are now self-sufficient, and they don’t need to worry about supporting their dependents. 

Of course, life has a way of throwing you unexpected curveballs. What if you or your dependents need money for something else after you die? Decreasing term life insurance wouldn’t help you with that. 

Decreasing term life insurance used to be more popular than it is today because it was less expensive than level term life insurance. However, the life insurance market has gotten very competitive over the years, and now you can usually find level term life insurance for only a marginal amount more than decreasing term life insurance. 

>>MORE: How Much does Term Life Insurance Cost?

Decreasing Term Life Insurance Riders

You may be able to get a rider attached to your decreasing term life insurance policy, at an additional cost. Here are the most common riders:

  • Disability rider: Pays for your policies premiums if you become disabled. 
  • Accelerated death benefit rider: This allows you to collect a portion of the death benefit if you become terminally ill.

Also, you may be able to get a decreasing term rider attached to a regular term policy. 

Companies That Sell Decreasing Term Life Insurance

Decreasing term life insurance has fallen out of vogue lately and has become difficult to find. Although John Hancock and Farmer’s used to carry decreasing term life insurance, they no longer do; Farmers discontinued it in June of 2019. We could only find three companies that sell anything that could be considered decreasing term life insurance. 

Protective Life: Best for Decreasing Term After Initial Term

Protective Life has what they call “Custom Choice Universal Life” which is a policy that offers an initial period of 5-10 years and then the coverage decreases after that. To get a quote for this policy, you have to call, or you can get a quote for “Classic Choice” term life insurance online. 

>>MORE: What is Guaranteed Universal Life Insurance?

Prudential: Best for Decreasing Term Rider

Prudential doesn’t have decreasing term life insurance policies, but you can have a decreasing term rider attached to a term life insurance policy, and the rider decreases over time. For example, if you had a $50,000 term life insurance policy, you could add a $25,000 decreasing term rider to help you pay off a mortgage in case you die during the term of the policy. This goes down over time.

Banner: Best for Reducing Coverage

Banner doesn’t really have decreasing term life insurance, either, but you can decrease the amount of coverage you have, but only once during the lifetime of the policy. This would correspond to people who need less insurance as they save more money and children become self-sufficient.

Last Thoughts

Decreasing term life insurance is an outdated form of life insurance that may be difficult to find. It might be better to get short term policies and then renew as you need less and less insurance, or just get a longer term policy with a lower benefit.

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