Decreasing Term Insurance

What is 'Decreasing Term Insurance'

Decreasing term insurance is a type of annual renewable term life insurance that provides a death benefit that decreases at a predetermined rate over the life of the policy. Premiums are usually constant throughout the contract, and reductions in policy payout typically occur monthly or annually. Term lengths can range anywhere between one and 30 years.

BREAKING DOWN 'Decreasing Term Insurance'

The theory behind decreasing term insurance holds that a person's need for high levels of insurance decreases with age and certain liabilities no longer exist. Numerous in-force decreasing term insurance policies takes the form of mortgage life insurance, which pegs its benefit to the remaining mortgage on the insured’s home. Decreasing term insurance is generally not advisable for someone who has no other life insurance. Term life policies can be purchased at affordable levels and provide the security of a level death benefit throughout the life of the contract.

Inexpensive Life Insurance Protection

Decreasing term insurance is a more affordable option than whole life insurance or universal life insurance. The death benefit of the policy is designed to match the amortization schedule of a mortgage or any other personal debt that may be too large to be serviced from remaining household income in the event of a wage earner’s death. Because decreasing term insurance offers a pure death benefit without cash accumulation, the insurance option offers the least inexpensive premium for comparable face amounts between permanent and temporary life insurance.

A 30-year-old male who is a non-smoker might pay $25 monthly through the life of a 15-year $200,000 decreasing term policy customized to parallel a mortgage amortization schedule. The monthly cost for a level-premium decreasing term plan does not change. As the insured ages, the risk to the carrier increases, warranting an equal monthly premium for a declining death benefit. A permanent policy with the same face amount $200,000 could require premium payments of $100 or greater per month. While some universal or whole life policies allow reduction of face amounts, the policies frequently hold fixed death benefits.

Additional Advantages of Decreasing Term Life

While the predominant use of decreasing term insurance extends to personal asset protection, small business partnerships often employ temporary life options to insure indebtedness incurred for startup costs or operational expenses. In this way, the business can affordably insure commercial loan amounts. If one partner dies, the death benefit proceeds from a decreasing term policy can be used to fund continuing operations or retire the percentage of the remaining debt for which the deceased is responsible.