What is decreasing term insurance?
Decreasing term life insurance is a term life policy with a death benefit that gets smaller over time. It's beneficial if you expect your loved ones to gradually need less financial support as time passes. Because the policy's payout decreases over time, decreasing insurance is typically more affordable than other term life insurance policies, making it a viable way to protect against significant shorter-term expenses. Availability of decreasing term policies varies by insurer.
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How does a decreasing term life insurance policy work?
Like other term life insurance policies, a decreasing term life policy provides coverage for a defined period, usually between five and 30 years. When you purchase a decreasing term policy, you'll pick the number of years it will be active (usually five to 30 years) and your starting death benefit. After that, the payout your beneficiaries can receive will decrease a certain percentage each month or year (depending on the policy).
If you pass away during the policy's term, your beneficiaries can file a claim for the death benefit amount available at the time of your passing. If you're alive at the end of the policy's term, the death benefit will have decreased to zero and your coverage will terminate.
Example:You take out a $300,000, 30-year decreasing term life insurance policy to help your spouse continue making your mortgage payment in case you pass away unexpectedly. The death benefit is set to decrease by 3.33% per year for the life of the policy. If you die after 10 years, the payout would be around $210,000 or 30% of the original death benefit.
What are the advantages of a decreasing term life insurance policy?
Decreasing term life is more affordable: Term life insurance is generally cheaper than permanent policies like whole life and universal life. And decreasing term life insurance is typically even more affordable than standard term life policies since the payout gets smaller over time.
Decreasing term life can provide security for decreasing expenses: If you have large debts that will decrease over time like a mortgage, student loan, or business loan, decreasing term life can offer timely security in case you pass away and your debt is passed on to someone else (you'd make that person your beneficiary). It can also be a more affordable way to offer protection for children and family members who will depend on your income less and less as time passes.
What are the disadvantages of a decreasing term life policy?
Availability: Decreasing term life insurance isn't available through all insurers. If you're interested, you may need to shop around for life insurance to see who offers it.
Unexpected expenses: If you have unexpected expenses toward the end of your policy's term, your death benefit may be too small to fully cover them.
Is decreasing term life insurance cheaper than regular term life insurance?
A decreasing term life policy usually costs less than whole life and other types of permanent life insurance. And since the death benefit decreases over time, it may also be less expensive than a standard term life insurance policy with a fixed death benefit.
Is a decreasing term life insurance policy right for me?
Consider a decreasing term life insurance policy if you have specific expenses or debts that you want to make sure are covered in case you pass away, and your beneficiaries won't depend on your income long-term — for example, if your spouse has their own income or if your children are grown and self-sufficient. Non-decreasing types of life insurance may make more sense if your loved ones will need the original death benefit amount even if you pass away at an older age (while the policy is still active).
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