Decreasing Term Insurance | Bankrate

Term life insurance is a type of policy that, as the name suggests, covers you for a specific number of years. If you pass away during that time, your beneficiaries will receive a death benefit. This allows you to provide financial protection for your loved ones if you are not there. Most term policies are level term, which means you pay the same premium throughout the length of the policy, and receive the same death benefit. A less common type of term insurance is decreasing term. A decreasing term life policy includes the same premium throughout, like level term, but the death benefit slowly decreases throughout the life of the policy. This can make it a good option if you wish to provide resources to pay off a mortgage, auto loan or small business loan. Bankrate’s insurance editorial team did the research to help you determine if a decreasing term policy is right for you.

What is decreasing term life insurance?

Decreasing term life insurance is one type of life insurance that can meet a specific need. If you have debt that you are slowly paying off, such as a mortgage or small business loan, you may benefit from a life insurance policy that also decreases at roughly the same rate as your debt. Why is this possibly a better option? Because it’s likely that you’ll pay less for the coverage than you would for a level term policy. In some cases, purchasing life insurance might be a condition of a loan, and the beneficiary of the policy will be the bank that loaned you the money. In other cases, you might choose to buy a policy directly from an insurance company, and can name the beneficiary yourself. Decreasing term insurance can be a standalone policy, or it might be a rider that is added to a new or existing policy.

Decreasing term life vs. level term life

Decreasing term and level term are both types of term life insurance. That means that both feature financial coverage for a limited term of years, often somewhere between five and 30. The big difference between the two is the death benefit, which is the amount paid out if you, the insured, die before the end of the term.

With level term, the death benefit does not change throughout the life of the policy. With decreasing term, however, the death benefit drops in value each year. This may make it an excellent choice to cover loans that you’re paying off over time. Both types of coverage generally feature a level premium — that is, you pay the same amount periodically (usually each month) to keep the policy in force. But with decreasing term, you are likely to pay less overall.

Whether you choose decreasing or level term insurance may hinge on your budget and on the financial stresses your beneficiaries will face if you pass away. If your primary financial concern for your loved ones is a large debt, decreasing term may be of interest. However, if you have other financial considerations, such as the cost of raising children, paying for their education or income replacement for a spouse, then level term life will likely be more beneficial.

Purchasing decreasing term life insurance

To determine how much coverage to purchase, consider the financial needs you want covered if you were to pass away. The decreasing term policy’s face amount often initially starts equal to the total balance of a loan.

The number of life insurance companies offering decreasing term life insurance is limited in comparison to those that offer level life insurance policies, but here are a few companies that currently offer decreasing term life insurance:

You may also be able to purchase decreasing term life insurance through your lender when you borrow money from a bank or other financial institution. In some cases, it may be required to protect your lender’s interest in their loan.

How much does decreasing term life insurance cost?

Decreasing term life insurance is usually cheaper than level term life insurance because the death benefit decreases each year. With each decrease, the life insurance company has a lower risk and a lower death benefit payout if you die. However, your premiums typically remain the same throughout the life of the decreasing term life insurance policy, meaning you will be paying the same amount for less coverage towards the end of your policy term.

How much a decreasing term life insurance policy costs varies and is based on several factors, which may include:

• The amount of coverage you opt for
• The length of the term
• Your age
• Your health
• Your lifestyle
• Your occupation

Getting several quotes for term life insurance is an effective way to compare pricing for the same coverage and term limit to find the best rate. Life insurance companies have different risk assessment models and underwriting processes, so you might be able to secure the right coverage for your needs for less money by shopping around.

To provide another perspective on decreasing term insurance, we looked at online forums to see what real people are saying about their policies. Here’s a sampling of what we found on Reddit:

*The quotes and citations included on this page have been verified by our editorial team and are accurate as of the posting date. Outlinked content may contain views and opinions that do not reflect the views and opinions of Bankrate.

Who should consider a decreasing term life insurance policy?

Auto, business, mortgage and personal loans are examples of debt obligations that a decreasing term insurance policy could cover. Parents with teenagers might also benefit from decreasing term life insurance, which can provide a large benefit early on to offset expected financial expenses or outstanding tuition obligations. With age, the need for the children to receive financial protection may diminish.

Compared to standard term and permanent life insurance, decreasing term is usually the least expensive. However, decreasing term life does not offer a level death benefit and the premiums typically do not reduce over time as the benefit decreases. If decreasing your policy’s death benefit to match a decreasing financial need or obligation is not a concern, level term life insurance may be a better choice. Level term life policies can also often be converted to a permanent policy if you decide lifelong coverage is needed. With a decreasing term life insurance policy, option to convert is typically not available. It is also generally easier to find an insurer that offers level term life insurance policies, which is one aspect that may limit your choices for decreasing term life insurance altogether.

Frequently asked questions

• Is decreasing term insurance worth it?
  

  Decreasing term life insurance can be worth considering if you have a specific, definable financial obligation that is decreasing over time. This could be a mortgage, car loan, small business loan or some other sort of debt. If that is your situation, you might want to consider a decreasing term policy that matches the amount you owe. As that amount decreases over time, so would the policy’s death benefit. Since decreasing term life insurance tends to be cheaper than level term, this may help you save money while still providing the financial protection you need.

• At what age should you drop term life insurance?
  

  Whether you have level or decreasing term insurance, you may want to consider dropping it when you no longer have financial commitments that might saddle your heirs with debt if you were to pass away, whatever your age. For example, you might have a level term policy that is meant to provide tuition assistance for your children while they are in school. Once they have graduated and are on their own, there may no longer be a need for the policy. The same is true for decreasing term insurance. After you have paid off the loan that the policy is intended to cover, there would no longer be a need for coverage.