What Is Decreasing Term Insurance?

If you have a mortgage or other substantial debt, a decreasing term insurance policy may be an ideal way to get coverage to safeguard your assets for your loved ones. But what is decreasing term insurance? In this article, you’ll learn the basics of decreasing term life insurance so you can decide if this type of coverage is right for you.

What Is Decreasing Term Insurance?

For most term plans, the premium and death benefit remain unchanged over the contractual life of the policy, but for decreasing term insurance, the payout incrementally declines in value as the plan ages while premium rates typically stay the same. These policies, which have a life of 1 to 30 years, may be bought by individuals who want to safeguard their homes and other personal assets by providing dependents with enough money to pay off a specific debt if they die prematurely. This type of loan may also be required by some lenders when issuing substantial business or personal loans.

How Decreasing Term Life Insurance Works

When you purchase a decreasing term life insurance policy, you’re purchasing coverage for a certain number of years. During this period, the value of the policy decreases at a predetermined rate, usually monthly or annually, until it reaches zero. Decreasing term policies that are purchased to guarantee a mortgage or loan may be structured so the policy’s value at any time reflects the balance remaining on the debt.

If the insured dies while coverage is active, the beneficiary receives a death benefit that reflects the policy's face value at that point in time. This one-time payout is typically intended to pay off a specific debt or debts. If the insured outlives the plan's designated term, no payout is issued.

What Is Mortgage Life Insurance?

Mortgage life insurance is a decreasing term policy that’s specifically designed to reflect the payment structure of a mortgage. The policy’s duration typically matches the anticipated length of the mortgage, and the death benefit is generally paid directly to the lender. Decreases in policy value should reflect the current mortgage balance as it’s paid down.

For example, if a policyholder recently bought a house and holds a $150,000 30-year mortgage, they may want to make sure loved ones can pay off the property if they die prematurely. To do so, they may purchase a mortgage life insurance policy with a beginning value of $150,000 and a 30-year term. The value, or death benefit payment, of the insurance policy would decrease incrementally alongside the mortgage balance, until it reaches zero. Ideally, at that time, the mortgage is also paid off.

Some home loans require borrowers to maintain mortgage life insurance, but the requirement may be waived for individuals who have permanent life insurance.

Are There Reasons to Choose a Decreasing Term Policy Over Level Term Insurance?

Because decreasing term life insurance is usually intended to satisfy a specific financial need rather than to provide long-term financial support to beneficiaries, this type of policy isn’t ideal for everyone. However, some purchasers may have good reasons to opt for a decreasing term policy, which can provide enough coverage to safeguard important assets while keeping premiums affordable.

The following individuals may benefit from purchasing a decreasing term policy:

• Homeowners: New homeowners or those who have a high balance remaining on their mortgage can benefit from a decreasing term policy. Because your mortgage balance decreases with each payment you make, you’ll need a smaller death benefit each year to ensure payment in full. A decreasing term policy can safeguard your home so your dependents won’t lose it due to financial hardship if you die before it’s paid off.
• Business owners: If you’re a partner in a business venture or are paying down start-up costs on a new company, a decreasing term loan may be a smart way to safeguard your investment and protect your business partners in the event of your death.
• Parents: As children grow up, ideally, they'll become financially independent and require less support. Parents who want to make sure their kids are taken care of through adulthood may benefit from a decreasing term policy.
• Indebted individuals: If you want to guarantee your surviving spouse or other dependents can pay off debts you’ve incurred, a decreasing term policy may be the solution.

Are There Disadvantages to a Decreasing Term Policy?

The main disadvantage of a decreasing term policy is its shrinking death benefit, which makes it impractical for purchasers who want to provide long-term financial support for family or loved ones after they die. The other big disadvantage to this type of policy is its lack of maturity value. Once the contractual term ends, the policy no longer has value. Essentially, if you outlive your policy, your beneficiaries don’t get a death benefit.

Can You Renew a Decreasing Term Policy?

Whether you can renew a term policy depends on your carrier and individual contract, but some decreasing term policies may be renewable. If your policy is renewable, you can typically extend the coverage without submitting a new application.

Unfortunately, the price of the policy often increases with age. To avoid higher premiums upon renewal, consider purchasing a longer-term policy initially to account for potential delays in paying off debts, thus avoiding the need to renew the policy altogether.

Are There Alternatives to Purchasing a Decreasing Term Policy?

The type of insurance you purchase should always reflect your personal and financial needs. Depending on your situation, you may want to consider one of the following alternatives to a decreasing term policy.

• Level Term Policies: Because they offer a stable death benefit, level term policies are a better coverage choice if you want to pay down debt and ensure your family’s financial stability if you die. Plus, you can typically opt to decrease your coverage amount at any time to account for reduced debt, and doing so can result in lower premiums.
• Ladder strategies: A ladder strategy involves purchasing several small level term policies and staggering them so the coverage expires at intervals. Through a ladder strategy, you may be able to replicate a decreasing term policy while saving on premiums.

Consulting a Financial Advisor

If you have debt and dependents, choosing the right life insurance policy can be crucial for your family’s financial future. A financial advisor can help you understand your options and make an informed choice, so you’ll have the peace of mind that comes with knowing your loved ones can carry on even after you’re gone.