Decreasing term insurance is a type of renewable term life insurance with coverage that decreases over the life of the policy at a predetermined rate. While premiums usually remain constant throughout the contract, reductions in coverage typically occur monthly or annually. Terms can range from 1 to 30 years, depending on the insurance plan offered by the company.
Decreasing term life insurance is often used to secure the remaining balance of an amortizing loan, such as a mortgage or business loan, over time. This type of insurance can be contrasted with level-premium term insurance.
Key Takeaways
- Decreasing term insurance features a death benefit that gets smaller each year, according to a predetermined schedule, often mirroring loans such as mortgages, with premiums that decrease over time.
- It is often purchased for personal asset protection but may also be required by lenders to guarantee the remaining balance of a loan until maturity in the event of the borrower’s death.
- The curtains of its primary purpose delineate increased affordability compared to traditional term or permanent life insurance policies.
Decreasing Term Life Insurance Explained
Term life insurance provides a death benefit for a specific timeframe. For instance, a 20-year term life insurance policy offers level premiums and the same death benefit throughout its term. Conversely, decreasing term insurance features a declining death benefit and decreasing premiums, set to a schedule determined when the life insurance policy is purchased, which might be customized between the insurer and the insured.
The rationale behind decreasing term insurance fits the scenario where with age, liabilities (like loans) decrease, thereby reducing the need for high levels of insurance. Many decreasing term policies mirror mortgage life insurance, which aligns the benefit with the mortgage balance of the insured’s home.
This type of insurance might not be fully adequate for an individual’s life insurance needs, especially if they have dependents. Standard term life insurance policies, being more affordable, offer a death benefit over the contract’s lifetime.
Understanding Benefits: Focus on Personal and Small Business Needs
The core use of decreasing term insurance aligns closely with personal asset protection and small businesses that need to secure debts against startup costs or operational expenditures. If a business partner dies, the death benefit proceeds from the decreasing term policy can either help fund operations to continue or reduce the remaining debt for which the deceased partner was responsible.
Mortgage protection is another predominant use case. When the death benefit follows an amortization schedule, insuring loans (like a small business loan) becomes affordable and remains cushy for the countersigned arrangement.
Example of Decreasing Term Insurance
Imagine a 30-year-old nonsmoking male purchasing a 15-year $200,000 decreasing term policy aligned with a mortgage amortization schedule. He might pay premiums of $25 per month throughout the policy’s life. As he ages, the declining death benefit corresponds proportionally to that increase, mitigating risks for the carrier.
In comparison, a permanent policy with the same face value could cost around $100 per month. Whole-life policies with fixed death benefits or flexible amounts for policy loans contrast such a setup sharply but impose higher premiums.
Who Might Benefit?
Small business owners and partners would benefit greatly to cover indebtedness due to startup costs and operational expenses. The policy allows robust planning, guaranteeing commercial loan amounts affordably while cross-tying to personal asset protection measures, as exemplified in the secured structure described.
Drawbacks to Consider
A key drawback lies in the term’s defining feature: as the death benefit declines, it leaves potentially insufficient coverage later. Saving on premiums initially may result in later undercoverage during unexpected events.
Cost Comparison: Does It Always Win?
Indeed, it’s cheaper because the corresponding premiums and death benefit decrease proportionally over time.
End of Policy: What Next?
Upon reaching the end of the policy term, both the decreasing death benefit and the policy coverage terminate.
Related Terms: renewable term life insurance, level-premium term insurance, whole life insurance, universal life insurance.
References
- New York State Department of Financial Services. “Types of Policies”.
- Insurance Information Institute. “What are the Different Types of Term Life Insurance Policies?”
- Legal Information Institute. “Term Life Insurance”.
- National Association of Insurance Commissioners (NAIC). “Life Insurance”.
- Progressive. “What is Decreasing Term Insurance?”
