What is Decreasing Term Life Insurance?
Most consumers are very familiar with term insurance products, but what most people aren’t aware of is the specific types of term life insurance such as decreasing term insurance, level term insurance, and annual renewable term insurance.
In this article, we will go over the pros and cons of decreasing term life insurance and when you should consider purchasing decreasing term life insurance.
Decreasing term life insurance is a term life policy that the death benefit “decreases” annually. The death benefit continues to shrink until the policy pays out or till the coverage period ends.
How Does Decreasing Term Insurance Function?
Decreasing term insurance functions differently than a level term insurance policy. In a level term life insurance policy, the death benefit and premium remains constant for the term period chosen.
However, a decreasing term life insurance policy’s death benefit decreases annually. The two types of term products are similar in that the premium remains the same and the length of coverage is usually 5-30 years.
Check out the example below:
Let’s say you purchased a $500,000 25 year decreasing term life insurance policy. If you were to pass away in the first year, your loved ones would receive the full benefit of $500K
If the coverage decreases by 4% annually, then your death benefit would be reduced by $20,000 per year. So if you died in year 2, your loved ones would receive $480K.
The decrease in death benefit will continue until you pass away and the policy pays out or when the coverage runs out in year 25.
The Pro’s of Decreasing Term Life Insurance
The pro’s of decreasing term life insurance are:
The Con’s of Decreasing Term Insurance
The con’s of decreasing term life insurance are:
What Is Decreasing Term Insurance Often Used For?
Decreasing term life insurance is often used for consumers looking for temporary coverage in order to pay off a debt or financial obligation, such as:
- Mortgage Protection Insurance
- College Loan
- Business Loan
- Personal Loan
- Auto Loan
- Unhealthy and can’t qualify for level term insurance
A key feature of decreasing term life insurance is that most policies don’t require a physical exam and tend to ask minimal health questions. This could be a good fit for someone that doesn’t qualify for traditional term insurance, but needs coverage to protect his or her loved ones.
Who Sells Decreasing Term Insurance?
Decreasing term insurance is not a product that most life insurance companies carry. Below is a list of the top 5 companies that do offer decreasing term life insurance:
Sample Decreasing Term Life Insurance Rates
To get a better idea of how much decreasing term insurance may cost, check out the chart below.
The rates below are based on a 40 year old non-smoker qualifying for the best health class offered.
Alternatives to Decreasing Term Insurance
There are two other types of term insurance to choose from other than decreasing term. They are level term life insurance and annual renewable life insurance. The most popular is the level term life insurance. Below we will review each type and when they should be used.
Level Term Life Insurance
Level term life insurance is the best alternative to decreasing term life. Level term life comes with a guaranteed premium and death benefit for the term period chosen.
Term periods are the amount of time you want to have the coverage and range from 5-40 years depending on your age. Most level term life insurance can be converted to a whole life policy without any health questions.
Annual Renewable Term Insurance (ART)
Annual Renewable Term Insurance or ART is a term product that the premium increases each year and usually renewable to age 90. The death benefit remains level for the duration of the policy.
These types of term life insurance start out really cheap, but as you get older the premiums can really skyrocket.
Should I Buy Decreasing Term Insurance?
Whether or not you should buy decreasing term insurance will depend on your personal situation, but more often than not, you are going to choose level term insurance. Decreasing term life may be an option for:
- Homeowners looking to add additional coverage to cover the loan, mortgage insurance, or other debts.
- Consumers who want guaranteed debt coverage
- Consumers with health problems that don’t qualify for level term life insurance.
- Consumers looking to cover a single debt.
As stated above, your needs are going to dictate whether or not decreasing term is a good fit. We have found that most of the time, if you are in good health, that you can get level term life insurance for about the same price as decreasing term.
It’s important when looking into life insurance that you work with an independent insurance agent who has access to multiple carriers. This will insure that you get the product that best suits you and your family. If you need a quote or have any questions, please just let us know. We are here to help.
Frequently Asked Questions
What is decreasing term life insurance?
Decreasing term life insurance is a term life policy that the death benefit “decreases” annually. The death benefit continues to shrink until the policy pays out or until the coverage period ends.
Is decreasing term life cheaper than level term life?
Yes, decreasing term life will usually be cheaper than level term life. But sometimes the difference is very little, so both options should be explored.
Does the benefit or premium decrease with decreasing term insurance?
The death benefit decreases annually on a decreasing term life policy.