A decreasing term life insurance policy is a specific policy type with a level of coverage (or death benefit) that decreases over time, usually every year. When a decreasing term policy is purchased, the death benefit decreases periodically until the end of the term. This is presumably when the policyholder’s need for coverage also ceases.
Decreasing term insurance is typically used to cover a temporary financial obligation, like a tuition loan or mortgage. If you want life insurance to cover this temporary financial liability, you can purchase a policy that decreases the death benefit as you pay down the loan. In this case, if you pass away before the loan is paid off, the remaining death benefit is paid to your beneficiary. Because of the diminishing death benefit, decreasing term life insurance may be cheaper than level term life insurance.
What is decreasing term life insurance?
Decreasing term life insurance is a temporary type of life insurance designed to cover a specific financial need, which is usually a loan or other type of outstanding debt. Decreasing term life insurance is commonly called DTA insurance or mortgage insurance. Where you buy decreasing term life insurance matters; if you buy it directly from an insurance company, you will be able to choose the beneficiary. If you buy it as part of your loan instead, the bank is usually the beneficiary.
As an example of how decreasing term insurance works, say Bill wants to cover his mortgage so that his wife, Mary, can keep the house if he passes away. They just bought a house with a 30-year mortgage for $500,000. Bill buys a 30-year decreasing term life insurance policy with a $500,000 death benefit and lists Mary as the beneficiary. If he dies in the first year, Mary gets the full $500,000. But if he dies in the third year of the policy, Mary will receive a reduced death benefit of roughly $466,600. Each year, the death benefit will continue to decrease by about $16,600 until the 30-year term has expired.
Bear in mind this is an example scenario. Your rates and the amount your death benefit decreases over time will depend on the terms of your policy.
Decreasing term life vs. level term life
While there are some similarities — like level premiums — decreasing term life and level term life insurance policies function very differently. With level term life insurance, the death benefit remains unchanged throughout the term of the policy, as long as premiums are paid. Using the example above, Mary would receive the full $500,000 death benefit if Bill were to have purchased a level term life insurance policy and died in the third year of the policy term. The death benefit decreases over time with decreasing term life insurance. Both term policy types usually have the same range of term lengths, which range from five to 30 years, with some companies offering coverage for 40 years.
The main things to consider when choosing one or the other is your life insurance need and budget for coverage. If you have a decreasing need for life insurance over time, a decreasing term life policy may be the better option. It may also be cheaper than level term life insurance, so if cost is a factor, that may help you decide between the two.
|Decreasing term life||Level term life|
|Death benefit decreases over time||Death benefit remains level for the life of the policy|
|Usually costs less than level term||May cost more than decreasing term life policies|
|Typically covers decreasing debt and other financial obligations||Can cover a wide range of life insurance needs|
Purchasing decreasing term life insurance
To determine how much coverage to purchase, consider the financial needs you want covered if you were to pass away. If you have a five-year car loan for $20,000, it may make sense to get a five-year $20,000 decreasing term life insurance policy. Getting a policy that extends a bit beyond the loan term may be wise to cover any delays in payments that could extend the loan term.
The number of life insurance companies offering decreasing term life insurance is limited in comparison to those who offer level life insurance policies, but here are a few companies that do offer decreasing term life insurance:
Who should consider a decreasing term life insurance policy?
Auto, business, mortgage and personal loans are examples of debt obligations that a decreasing term insurance policy could cover. Parents with teenagers may also benefit from decreasing term life insurance, which can provide a large benefit early on to offset expected financial expenses or outstanding tuition obligations. With age, the need for financial protection may diminish.
Compared to standard term and permanent life insurance, decreasing term is usually the least expensive. However, decreasing term life does not offer a level death benefit and the premiums do not reduce over time as the benefit decreases. If decreasing your policy’s death benefit to match a decreasing financial need or obligation is not a concern, level term life insurance may be a better choice. Level term life policies can also typically be converted to a permanent policy if you choose to have a policy in place for your whole life. With a decreasing term life insurance policy, this option will likely not be available to you. It is also generally easier to find an insurer who offers level term life insurance policies, which is one aspect that may limit your choices for decreasing term life insurance altogether.
How much does decreasing term life insurance cost?
The cost of decreasing term life insurance is usually cheaper than level term life insurance because the death benefit decreases every year. With each decrease, the life insurance company has less risk and a lower death benefit payout if you die. However, your premiums will remain the same throughout the life of the decreasing term life insurance policy, meaning you will be paying the same amount for less coverage towards the end of your policy term.
How much a decreasing term life insurance policy costs varies and is based on several factors, including:
- The amount of coverage you opt for
- The length of the term
- Your age
- Your health
- Your lifestyle
- Your occupation
Getting several quotes for term life insurance is an effective way to compare pricing for the same coverage and term limit to find the best rate. Life insurance companies have different risk assessment models and underwriting processes, so you might be able to secure the right coverage for your needs for less money by shopping around.