Regardless of age or financial status, life insurance has beneficial qualities for most. Consider this: How would your family cover funeral expenses if you died? What about your outstanding debts? Life insurance ensures that your family can mourn without worrying about money.
While there are various life insurance policy options, the most popular are term and whole life coverage, with term being slightly more popular due to its lower monthly premiums. However, there are other options for those who worry about being able to pay their monthly premiums.
A decreasing term life insurance policy is a variety of term life insurance where the overall payout decreases over time, providing a gradually smaller premium to the policyholder. However, before you purchase a decreasing-term life insurance policy, there are a few things to keep in mind. Read on to learn more.
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What is Decreasing Term Life Insurance?
When it comes to term life insurance, decreasing term life insurance is an attractive option for someone on a budget that does not require a large payout, otherwise known as a death benefit.
In contrast to traditional term and whole-life coverage, the death benefits steadily decrease until either:
A) You die, and the benefit is paid.
B) You do not die, and the term ends.
Therefore, decreasing-term policies become cheaper over time as the overall likelihood the full death benefit will be paid to the beneficiaries is lower.
How Does Decreasing Term Life Insurance Work?
To understand how decreasing-term life insurance works, we need first to understand how term life insurance operates. Term life insurance allows individuals to purchase a life insurance policy for a specified period, with static premiums and death benefits.
For example, a 20-year level term policy provides coverage for 20 years with a static premium and death benefit. However, at the end of the term, the coverage expires. Therefore, if you die after your term ends and don’t purchase another policy, your beneficiaries receive no death benefit.
Many of those same principles apply to decreasing-term policies, except they are not static. Their price decreases gradually, along with the overall death benefit.
What Does Decreasing Term Life Insurance Cost?
Because life insurance is largely personalized, there is no pre-determined cost. As with other policies, various factors determine how much you pay in premiums, including:
- Age
- Smoking
- Your Overall Health
- The Length of the Term
- The Value of the Death Benefit
Overall, the younger and healthier you are, the less you pay in premiums; however, the preceding factors can certainly challenge that wisdom.
Advantages and Disadvantages of Decreasing Term Life Insurance
Because life insurance is highly personalized, various factors may benefit some but not others. Here are a few of the most common:
Advantages
When you die, your family becomes responsible for your outstanding debts like mortgages or auto loans. Because debts like these types of loans decrease over time, less coverage is required to cover those costs. Therefore, someone in this situation may find a decreasing term life insurance appropriate.
Another advantage of decreasing-term life insurance is the cost. Because the death benefit decreases over time, the premiums are more affordable, making it an excellent option for people with fixed or low incomes.
Disadvantages
Decreasing-term life insurance is not a good option for those who may incur more debt, such as medical costs. Additionally, as funeral prices continue to rise, a decreasing-term life insurance policy will not hold its same value.
Keep in mind that the general purpose of life insurance is to provide financial stability for your family’s future, and a decreasing-term life insurance policy may not provide that service.
Alternatives To Decreasing Term Life Insurance
Like most varieties of insurance, life insurance is highly personalized. If you are considering decreasing-term life insurance but are not sure it is the right choice for your situation, you may want to consider the following options:
Level Term Life Insurance
Level-term life insurance allows the distribution of death benefits regardless of the point in the term you die.
In the event of your death, level-term life insurance provides your beneficiaries additional flexibility to cover unplanned expenses. Expenses such as education, food, travel, and/or unforeseen financial problems could be covered by the money left over after funeral expenses.
Level-term life insurance is easy to obtain, doesn’t usually require any medical history review, and is purchased for 10-30 years. In contrast to decreasing-term life insurance, level-term policies are a good idea for those who are not confident their insurance needs will decrease over time.
Permanent Life Insurance
Permanent life insurance provides the highest benefits because, in contrast to term coverage, it does not expire. Additionally, the cash value builds over time which you can access as needed during the policy’s life.
Because permanent life insurance, like whole or universal life, does not expire,e it will be more expensive than a term policy. Permanent life insurance could be a good option if you want extra financial stability for your family.
Who Should Consider Decreasing Term Life Insurance?
There are some situations that a decreasing term life insurance policy makes sense. For instance, if you have debts that gradually expire over time (such as a mortgage or student loans), your beneficiaries may not need to pay them off when you die. Because less coverage is required down the road, there is little reason to continue to pay a static premium.
Another scenario applicable to decreasing-term coverage occurs when someone can’t afford a standard term or permanent life policy. Decreasing-term coverage is generally cheaper, and the price decreases over time.
Decreasing term life insurance is also an excellent nice option for business owners. If you are in a business partnership with unpaid loans and you die, your business partner takes on your share of the debt. Like individuals with personal loans, as the debt is paid off over time, the necessity of static coverage decreases simultaneously.