Decreasing term insurance is popular among homeowners who want to be sure that their mortgage will be paid off in the event of their death, reducing the financial burden on loved ones. But you should also assess your specific financial needs and obligations to determine if this insurance is the right choice for you.
A financial advisor You may find it helpful to create a financial plan to pay off debt and an estate plan to protect your family’s assets.
How Decreasing Term Insurance Works
Decreasing term insurance, also known as mortgage life insurance or mortgage protection insurance, is a type of life insurance policy where the death benefit gradually decreases over time. This type of insurance is often used to cover specific financial obligations that accrue over the years, such as a mortgage or other loan.
Coverage Period: The policy is typically purchased for a specific term, such as the term of a mortgage or loan. It is designed to align with the length of the financial obligation it is supposed to cover.
Declining Death Benefit: Unlike traditional life insurance policies, where the death benefit remains constant, in decreasing term insurance, the death benefit decreases with the term of the policy. The deduction is typically set in line with the outstanding balance of the mortgage or loan.
Objective: Decreasing term insurance is often used to provide financial protection to beneficiaries, such as family members or dependents, in the event of the policyholder’s death during the policy term. The decreasing death benefit is intended to closely match the decreasing balance of the mortgage or loan.
Premium: Decreasing term insurance policies often have lower premiums than traditional life insurance policies because the death benefit decreases over time. However, the premium remains the same throughout the policy term.
Non-Cash Payment: If the policyholder dies during the policy term, the beneficiaries get a payout based on the remaining death benefit. This payment is usually made in the form of a lump sum amount.
no cash value: Unlike some types of permanent life insurance policies, decreasing term insurance policies typically do not accumulate cash value over time. The primary objective of the policy is to provide coverage for specified financial liability.
Conversion Options: Some policies may include a conversion option that allows the policyholder to convert a decreasing term insurance policy into a different type of policy, such as a whole life or universal life insurance policy, without the need for a medical examination.
Decreasing Term Life vs Level Term Life
When choosing life insurance, make sure you consider your specific financial goals, obligations and protection needs. Here are eight key differences between decreasing term life and level term life insurance:
Death Benefit: While the declining term life death benefit decreases over time, often aligning with the outstanding balance of a specific loan, the level term life death benefit remains constant throughout the policy term.
Objective: Decreasing term life is primarily used to cover specific financial obligations that decrease over time, such as mortgages or loans. On the other hand, Level Term Life offers comprehensive financial protection and can be used for various purposes such as income replacement, debt coverage and education funding.
Premium: Decreasing term life premiums remain constant throughout the policy term and are generally lower than level term life insurance. But level term life premiums are generally higher because of the continuous death benefit and wider coverage.
cash value: The cash value generally does not accumulate over the life of the decreasing term. And most level term life policies also do not accumulate cash value, although some variations such as return of premium (ROP) policies offer a return of premiums paid if the policyholder survives the term.
Coverage Period: The life of a decreasing term usually corresponds to the term of a specific loan, such as a mortgage. However, level term life is bought for a specific term, such as 10, 20, or 30 years, depending on the needs of the policyholder.
Beneficiaries: If the life policyholder dies during the term of the decreasing term, the beneficiaries get a payout based on the remaining death benefit. But when the Level Term Life policyholders die during the term, the beneficiaries get payouts based on the Level Death Benefit.
Conversion Options: Both decreasing term life and level term life policies may offer a conversion option to switch to a different policy type without a medical exam.
Suitability: Decreasing term life may be appropriate for individuals who want to cover specific decreasing financial obligations such as a mortgage. Level Term Life is suitable for comprehensive coverage needs, such as income replacement, loan coverage, education funding, etc.
Benefits of Decreasing Term Insurance
How Does Decreasing Term Life Insurance Work? 3
Here are 10 common benefits of decreasing term insurance to consider:
effective cost: Decreasing term insurance premiums are generally lower than other types of life insurance, making it an affordable option for coverage.
In line with specific responsibilities: Decreasing term insurance is designed to align with specific financial obligations that decrease over time, such as a mortgage. This ensures that the coverage matches the reducing debt.
Mortgage Security: It provides financial security to the beneficiaries in the event of the death of the policyholder, ensuring that the mortgage or loan can be repaid, thereby relieving the loved ones of that financial burden.
Simplicity: The concept is simple. The decreasing death benefit is matched by the decreasing balance of the liability it is intended to cover.
Concentrated Coverage: It targets a specific financial need, which can be valuable to individuals who want to ensure that their loans are covered if they meet an untimely death.
Tenure Flexibility: The policy can be tailored to match the term of the financial obligation, providing coverage for the required period.
No Cash Value Worries: Since it focuses on providing a death benefit to cover a specific liability, policyholders do not need to worry about the cash value component found in some other policies.
Conversion Options: Some policies provide a conversion option, which allows policyholders to convert a reducing term policy into a different type of policy, such as a permanent life insurance policy, without medical examination.
Safety for Loved Ones: Beneficiaries are protected from the potential financial stress of outstanding loans, allowing them to maintain their living status and financial stability.
No Medical Examination for Conversion: If a conversion option is available, policyholders can switch to a different type of policy without the need for medical examination, even if their health has changed.
Examples of When to Get Decreasing Term Insurance
Here are 10 common examples of situations where a decreasing term insurance policy can be beneficial:
Mortgage Security: A common use case is to cover mortgages. As you pay off your mortgage balance over time, the coverage amount is reduced in line with the remaining mortgage loan amount. This ensures that if you die before the mortgage is paid off, your loved ones can use the insurance payout to pay off the mortgage.
loan repayment: If you have other outstanding loans like personal loan or car loan, a policy with decreasing tenure can help ensure that these loans are taken care of if you are not around to repay them.
Business Loan: Business owners may consider taking out term insurance to cover business loans. It protects the business and its co-owners in case of death of the policyholder, thereby preventing the loan from becoming a burden on the business.
Education Funding: Parents can use a reducing term policy to ensure that their children’s education expenses are covered, especially if they are paying off education loans that they want to protect their family from.
Single Financial Liability: Any financial liability whose balance tends to reduce over time can be covered using this type of insurance. This can include credit card debt, home equity loans, or any other type of debt.
Term Life Insurance Options: If you are looking for term life insurance but have specific liabilities that you want covered, a decreasing term policy may be a targeted option.
Loan matching coverage: As you age and your financial obligations change, decreasing term insurance can help you match your coverage to those obligations.
Temporary Requirements: If you anticipate that your financial liabilities will reduce significantly over time, a reducing term policy can provide cost-effective coverage for a specific period of need.
estate planning: Incorporating decreasing term insurance can be part of your estate planning strategy to ensure that specific debts are taken care of without burdening your beneficiaries.
Supplement to other policies: If you already have other forms of life insurance but want to make sure specific liabilities are covered, a decreasing term policy can provide targeted coverage.
ground level
How Does Decreasing Term Life Insurance Work? 4
Decreasing term insurance can be especially beneficial for individuals who want to provide coverage for specific debt or financial obligations and want a cost-effective solution that aligns with the decreasing balance of those obligations. It is important to carefully evaluate your needs and compare policies to ensure that you are getting the right coverage for your situation.
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A financial advisor can help you choose the best life insurance option for your finances. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three verified financial advisors serving your area, and you can decide which one feels right for you by conducting a free introductory call with your advisors. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
