There are hundreds of life insurance options available on the market today. No matter how much coverage you need, the term length you desire, or the type of coverage that suits you best, you have plenty of options. One of those, of course, is decreasing term life insurance.
This type of coverage provides a guaranteed death benefit for a steady premium over the length of the term, just like any term life insurance policy. The difference is that with decreasing term policies, the amount of your benefit will actually drop over time.
So, why would anyone want a policy that is worth less as time goes on? Are there benefits to this type of coverage? Here’s a look at decreasing term life insurance and what all it entails.
What is Decreasing Term Coverage?
As the name implies, decreasing term coverage is a type of life insurance where the actual death benefit will drop over time. As the years go by, your policy will be worth less and less, even though your premiums will stay the same.
When you first purchase any life insurance policy, you will choose a term length and a death benefit (or policy value). Let’s say you were to choose a 30-year, $500,000 term life policy; in that case, your beneficiaries would receive $500,000 whether you passed away in year 5 or year 25.
However, if you chose a 30-year, $500,000 decreasing term life policy, the payout would look a little different. Every year that you held the policy and didn’t pass away, that death benefit would drop. Eventually, you would reach year 30 and your benefit would reach a number significantly lower than the original half-million the policy had once been valued at.
So, why would anyone choose this type of coverage?
Who It Was Intended For
Decreasing term life insurance was originally designed for homeowners, and its diminishing value was meant to mirror that of a mortgage loan balance. Since an outstanding mortgage is one of the biggest reasons to purchase life insurance coverage for your family, it makes sense that buy coverage that correlates.
As time goes on, your mortgage balance drops; correspondingly, so does your decreasing term coverage. The idea is that if you owe less on your home over time, then your life insurance needs will also drop.
It’s more than just your mortgage, though. As we get older, our financial needs will likely decrease anyway. This is because our children will grow up and eventually support themselves, so you won’t have to worry about providing for their everyday expenses.
We also save toward retirement and our children’s education over the years. So by the time our life insurance term expires, we probably have much larger assets to leave behind than when we first began. This means that you probably won’t need as much life insurance in year 1 of your policy as you will by the time you reach year 30, so why should you pay for the same amount of coverage through the years?
So, while this makes sense for many of us, is decreasing term life really the best option?
Decreasing Term vs Level Term
In order to decide that, let’s take a look at a typical term life insurance policy (also called level term) compared to one of these decreasing term versions.
With both level term and decreasing term, you will pay the same premium on day one as you will on the very last day. You’ll also enjoy the same coverage benefits -- with few exceptions, your loved ones will receive your death benefit whether you get ill and pass away, are killed in an accident, or any number of other circumstances.
The difference between decreasing term and level term, then, is the benefit itself. With level term, of course, you can expect that your policy value will remain constant from beginning to end. If you want to decrease your coverage at any time – say you pay off your mortgage, your child gets a scholarship, or experience any number of other financial changes – you can simply do. Either request to adjust your current policy or renew your existing one with new terms. In turn, you can also expect your premiums to decrease.
Decreasing term life, though, works differently. As mentioned, your benefit will be highest on day one. Then, as time goes on, you can expect that your policy value will drop (usually decreasing in value annually), until it is either paid out or reaches the designated lower limit. So, while you are still lowering the amount of life insurance coverage you hold – likely corresponding to the amount of life insurance you need as time goes on – there’s one key difference: you won’t be paying any less for premiums.
Even though your decreasing term coverage is dropping in benefit, it won’t be dropping in price. You will still pay the same amount in premiums each month. Another downside is that your decreasing term life benefits will be dropping according to a predetermined schedule. This means that if things change, you don’t have any control over when or how much your life insurance coverage will lower.
Some companies claim that decreasing term life insurance is cheaper than level term life, still making it a better bargain in the end. However, level term life has gotten even more competitive over the years, so you’re often able to find very good rates. This is especially true if you are young and/or in great health. In that case, you might be better off with a level term life policy, decreasing the benefit as you see fit and as your needs change.
Is It Right for You?
It’s important to determine why you’re purchasing life insurance to begin with. If you are looking to secure your mortgage balance and protect your family’s finances in the process, a decreasing term life policy might do the trick. This is also the case if you want to provide more security while your children are young, but know you’ll need less coverage as they grow.
However, you should definitely shop around. Today’s level term life policies are more competitively-priced than ever before, making them a great option even if you know you’ll make changes over the years. They also offer you the flexibility to decrease benefits on your schedule and as your finances actually change, not according to a set schedule.
If you are still wondering whether decreasing term life might be right for you, or how to decide between that and level term life, chat with our team! We are available any time you need us at firstname.lastname@example.org