Decreasing Term Insurance: Definition, Example, Pros & Cons

About Decreasing Term Insurance:

Decreasing term insurance is a type of renewable term life insurance with coverage decreasing over the life of the policy at a predetermined rate. Premiums are usually constant throughout the contract, and reductions in coverage typically occur monthly or annually.1 Terms range between 1 year and 30 years depending on the plan offered by the insurance company.2

Decreasing term life insurance is usually used to guarantee the remaining balance of an amortizing loan, such as a mortgage or business loan over time. It can be contrasted with level-premium term insurance.

KEY TAKEAWAYS:
  • Decreasing term insurance features a death benefit that gets smaller each year, according to a predetermined schedule that also sees premiums decrease over time.
  • Decreasing term insurance is often purchased to provide personal asset protection.
  • It may also be required by a lender to guarantee the remaining balance of a loan until its maturity in case the borrower dies.
  • A decreasing term life policy is very similar and may mirror the amortization schedule of a mortgage.
  • Decreasing term life insurance is less expensive than traditional term or permanent life policies.

Understanding Decreasing Term Insurance :

Term life insurance is a form of coverage that provides a death benefit for only a certain length of time.3 For instance, a 20-year term life insurance policy would feature level premiums and the same death benefit over the course of its term. Decreasing term insurance instead features a declining death benefit over time, along with decreasing premiums. These amounts will be set to a schedule when the life insurance policy is purchased and may conform to a standard schedule or be customized between the insurer and the insured.

Benefits of Decreasing Term Life:

The predominant use of decreasing term insurance is most often for personal asset protection. Small business partnerships also use a decreasing term life policy to protect indebtedness against startup costs and operational expenses.

In the case of small businesses, if one partner dies, the death benefit proceeds from the decreasing term policy can help to fund continuing operations or retire the percentage of the remaining debt for which the deceased partner is responsible. The security allows the business to guarantee commercial loan amounts affordably.

Decreasing term insurance is a more affordable option than whole life or universal life insurance.5 The death benefit is designed to mirror the amortization schedule of a mortgage or other personal debt not easily covered by personal assets or income, like personal loans or business loans.

Decreasing term insurance allows a pure death benefit with no cash accumulation, unlike, for example, a whole life insurance policy. As such, this insurance option has modest premiums for comparable benefit amounts to either permanent or temporary life insurance.

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