The logic is simple, if at the time of purchase you needed a certain amount of death benefit to cover expenses and debts, the total benefit needed should be lower over time.
Mortgage Life Insurance
The concept makes the most sense for mortgages, but can be applied to other scenarios as well. For example, someone who has a $2,000 monthly mortgage payment for 30 years may purchase a $720,000 initial death benefit. As the mortgage is paid down, so would the death benefit reduce. If the insured dies 10 years in, the death benefit would be $480,000.
Another way this is repackaged is as an income replacement. While all life insurance can be, and are usually, used as income replacement, these policies are actually decreasing term life insurance policies. Similar to the mortgage concept, they take the insured’s income and promise to replace all the remaining paychecks until retirement age or through a certain time period, i.e term.
Level Term vs. Decreasing Term Life Insurance
Term life insurance is explained in detail here. In short, level premium term life insurance provides a set death benefit for the entire term in exchange for a set premium. On the two opposite sides of the spectrum, you have annual renewable term, also known as increasing premium term, and decreasing premium term.
Annual renewable term has a level death benefit and an ever-increasing premium while, as the name implies, decreasing term’s death benefit is on a downward slope. All term policies have their place, but the most common—by a longshot—is level premium term.
Level premium term fills the regular need of providing a death benefit to a family without breaking the bank. Annual renewable term offers the lowest possible premium for a level death benefit where you are technically only ever paying for the cost of insurance. Decreasing term works best to manage a specific liability such as a mortgage or other debt.
The chart below illustrates the effect of a decreasing death benefit as opposed to a level death benefit.
Should you buy a decreasing term policy?
First of all, good luck finding one. Decreasing term life insurance is no longer available in the United States from the majority of insurance carriers. Even the few companies that do offer them extend these policies through the simplified issue policies explained in more depth in this article. This results in proportionally higher premiums, when compared to regularly underwritten policies. For someone getting a simplified issue policy anyway, then you do have a legitimate question.
As clearly illustrated in this chart, while you do save $27.66 a month, it comes at great cost come year two and onward because the death benefit will start to decrease, while the premium will stay level.
Can Term Life Insurance be Cancelled?
Yes, term life insurance can be cancelled at any time, whether it is a level premium term, annual renewable term or decreasing term. There is no cash value in a term policy, so all you really have to do is stop paying the policy. You can also call your agent or the insurance company and ask them to send you cancellation paperwork, if you are so inclined. There is no penalty to cancel a term life insurance, however, you do not get your money back once your “free-look” period ends.
Can you decrease term life insurance?
Yes, a level term policy can be decreased in death benefit in order to lessen the premiums if needed. Call your agent or insurance company so that they can send you the correct paperwork. Keep in mind that if you want to raise the benefit to its original level you will likely need to requalify.
Do you get money back at the end of term life insurance?
No, similar to car or homeowners insurance, you do not get your premiums refunded at the end. That being said, with life insurance there are a select few companies who offer a rider called “return of premium” where if you pay extra (around double) during the policy term, at the end, if you are still alive, they will refund the entire amount paid into the policy.
Does Term Life Insurance decrease in value?
Most do not, decreasing term policies do. However, even though the death benefit stays level, due to inflation the purchasing power will be less in future years. To combat inflation, one may look for a permanent policy with an increasing death benefit option.
How does a decreasing life insurance policy work?
The death benefit of a decreasing term policy declines throughout the term, usually with a mortgage or something similar. The premium, however, stays level throughout the life of the policy.
Should I get level or decreasing term life insurance?
Most likely, a level term would be a better option due to the death benefit staying the same throughout the lifetime of the policy while the premium is only slightly higher.
What decreases in decreasing term insurance?
The death benefit decreases, and the premium stays level.
What is a decreasing term life insurance policy?
A term life insurance policy where the death benefit decreases term policy declines throughout the term, usually in cohort with a mortgage or something similar. The premium however stays level throughout the life of the policy.
What is decreasing term life insurance used for?
Decreasing term life is usually used to insure for a mortgage.
What is the difference between life insurance and decreasing life insurance?
Most life insurance policies have level or increasing death benefits. They contrast with decreasing life insurance policies in which the death benefit goes down over time.
What is the main difference between decreasing term insurance and level term insurance?
The main difference is the death benefit. With a level term, the death benefit stays the same throughout the life of the policy. Decreasing term’s death benefit declines every year.
What’s the best level term or decreasing term?
Level term is a much better policy in almost every scenario due to the level death benefit for the life of the policy.