Decreasing term life insurance provides coverage for a set period of time, just like all term life insurance. But this type of term life is unique because the payout amount gets lower and lower over the life of the policy. It’s best utilized to cover a debt, like a mortgage.
A level term life insurance policy is usually a better value for your money, because while the premium amounts will be comparable, the payout will stay the same throughout the duration of the coverage.
How does decreasing term life insurance work?
Decreasing term life coverage usually lasts five to 30 years. The death benefit decreases over time on a schedule set by your insurer.
For example, the coverage amount might correspond with a personal loan or mortgage payment schedule.
Alternatively, your provider could also set the death benefit to decrease by $100,000 every five years, or set a percentage decrease every year.
The most common use of decreasing term life insurance is mortgage protection insurance (MPI). MPI is a decreasing term life insurance policy that’s tied to your mortgage loan. You can often purchase this type of policy through your bank, but some life insurance companies offer it, too.
In the event of your death, the life insurance company pays the death benefit directly to the mortgage company. If you take out a loan for a $400,000 mortgage, and you were to die with $200,000 remaining on it, your insurance provider would pay out $200,000 to your lender.
When should you buy a decreasing term policy?
You might consider buying a decreasing term life policy if you only need your benefit to pay the balance of a loan in the event of your death (like a mortgage), and don’t have any other expenses you’d need covered. With a decreasing term life policy you never pay for more life insurance than you need.
Advantages of decreasing term life insurance
Your mortgage will be protected if you die. Your family will be able to keep their home or other assets purchased with debt.
If you’re a small business owner with a business loan, the business can cover the loan and keep running.
You can take out debt if you need to. Some lenders require you to have a life insurance policy to cover the money you want to borrow. Getting decreasing life insurance allows you to pay the bare minimum to get the coverage you need for any loans.
Disadvantages of decreasing term life insurance
You end up paying the same price for less coverage as the term goes on, whereas with a level term, your premiums and coverage don’t change.
Your family or beneficiaries won’t be able to use the death benefit to cover other expenses in the event of your death. Because decreasing term life policies are generally tied to a specific loan, the payout can only be used to cover that debt.
Comparing decreasing term life vs. level term life insurance
Level term | Decreasing term | |
|---|---|---|
Duration | Five to 40 years | Five to 30 years |
Guaranteed death benefit | Yes | Yes, but benefit decreases over time |
Premiums | Guaranteed to remain level | Guaranteed to remain level, even as benefit decreases |
Best for | Getting coverage for several years and for more than just debt | Covering one large debt or loan |
Is decreasing term life insurance worth it?
For the most part, decreasing term life insurance isn’t worth the cost. Not only are you paying the same amount throughout the term for a shrinking benefit, but it often doesn’t account for your changing coverage needs.
Alternatives to decreasing term life insurance
If your primary reason to purchase life insurance is to ensure that one debt is covered in case you die, a decreasing term policy could be an option. Still, most people can address this same financial need with standard term life insurance or the life insurance laddering strategy.
Term life insurance: A traditional term life policy can be used to cover all your debts and give your family financial support for everyday expenses and savings. The death benefit never changes, even if you pay off your debts. This way, you’re not paying more for less coverage as time goes on. Most term life insurance policies also give you the flexibility to lower your death benefit and lower your premiums if you need to.
The ladder strategy: This is a method in which you buy multiple level term life policies of varying lengths and coverage amounts. The laddered policies expire as your financial obligations decrease, so you’re only ever paying for the coverage you need.
If you’re not sure which type of life insurance is best for you, a Policygenius expert can help you find the right policy for your needs.
