Decreasing term insurance
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Key takeaways
- Decreasing term life insurance, sometimes called mortgage insurance, provides temporary coverage for a specific financial need like an outstanding debt or mortgage.
- It typically costs less than level term life insurance because the death benefit decreases to account for the fact that the debt obligation will likely lessen over time.
- A decreasing term life insurance policy could be a good option for anyone with ongoing financial obligations like personal loans, business debts, a car loan or a mortgage.
- The cost of decreasing term life insurance will depend on the amount of coverage that you need, and you cannot convert this type of coverage into a permanent policy.
Life insurance provides an assurance that your dependents and loved ones will have financial support in case you pass away. A decreasing term life insurance policy allows the coverage and death benefit to decrease over time with the expectation that your dependents are likely to need less help as time passes. These types of policies are useful when there is a specific outstanding financial obligation that will need to be taken care of, such as tuition payments or a mortgage. A decreasing term insurance plan can help to cover these temporary liabilities while typically costing less than level term life insurance. Bankrate’s insurance editorial team explains what decreasing term insurance is and how it works so you can decide if it’s right for you.
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.
With decreasing term life insurance, your death benefit will decrease over time – but the rate at which it decreases and what the ultimate benefit payout will be will depend on the terms of your insurance policy and the type of coverage that you purchase.
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Whole life insurance combines life insurance with an investment component.
- Coverage for life
- Tax-deferred savings benefit if premiums are paid
- 3 variations of permanent insurance: whole life, universal life and variable life include investment component
Term life insurance is precisely what the name implies: an insurance policy that is good for a specific term of time.
- Fixed premium over term
- No savings benefits
- Outliving policy or policy cancellation results in no money back
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Decreasing term life vs. level term life
While decreasing term life insurance and level term life insurance similarly seek to provide financial support following a death and do share some similarities, like level premiums, they are ultimately different types of policies that function 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. However, if you’d like to ensure that a death benefit is provided no matter what and additional financial support is available for your loved ones, a full term life insurance policy may better suit your needs.
| 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.
Here’s an example: Let’s say 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 that offer level life insurance policies, but here are a few companies that do offer decreasing term life insurance:
How much does decreasing term life insurance cost?
Decreasing term life insurance is usually cheaper than level term life insurance because the death benefit decreases each year. With each decrease, the life insurance company has a lower risk and a lower death benefit payout if you die. However, your premiums do 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.
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 might 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 the children to receive 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 often be converted to a permanent policy if you choose to have a policy in place for your whole life (although you’ll need to ensure that is a possibility when you first purchase the policy). With a decreasing term life insurance policy, this option is typically not available. It is also generally easier to find an insurer that offers level term life insurance policies, which is one aspect that may limit your choices for decreasing term life insurance altogether.
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