What Is Decreasing Term Life Insurance?
Decreasing term life insurance is yet another version of term life insurance.
The idea of decreasing term life insurance can be pretty confusing for what you have always heard about life insurance. Generally, you know, insurers channel a gross amount of money to the beneficiaries when a policyholder passes away. Or, when the policy matures, a good amount of money goes to the policyholder. In compliance with a contract with the policyholder, the insurer provides the benefit. But a near-opposite thing happens when you buy a decreasing term life insurance policy. It offers you neither the much-said ‘lump sum money’ upon death; nor does it ensure a big amount at policy expiry. Instead, as you pay more to the insurer, you get less for the benefit. In the end, nearly 80% of the death benefit peters out.
An academic-like definition of the decreasing term life insurance can be: a term policy that has the coverage decrease over time.
What Happens in Decreasing Term
As its name suggests, a decreasing term life insurance policy belongs to the non-whole category. It belongs to the term life insurance category. That is, it is fundamentally designed to work for a set period known as the term. Usually the terms consist of 1, 15, 20, 25 and 30 years. You buy a fixed amount of death benefit for a level rate. The benefit keeps being sliced off each month.
You may wonder— why should I buy such a policy?
The reason the decreasing term policy works this way has its reasons.
You do not buy a decreasing term life insurance policy for the death benefit to reach to your dependents. In place of the dependents’ survival, what works in your mind is the repayment of outstanding loans. You want to ensure that your dependents do not have financial burden from the outstanding loans falling on them.
Being related to mortgage repayment, this policy is also known as mortgage term insurance. In tune with the mortgage loan, the death benefit decreases over time. Farmers Insurance explains why: to more closely follow the declining loan balance of a traditional fixed home mortgage.
If you find decreasing term not to be your choice for the way it works, there is increasing term life insurance for you. It works the exact opposite way.
Pros of Decreasing Term Life Insurance
If you have a big load of loan that you worry about, decreasing term life can be of good use. It keeps off your concerns of repayment when you think of death. Also, you can stay sure that your dependents will not have to struggle to retain the valuable assets.
Initially for several years, the cost of the mortgage term life insurance or decreasing term life insurance policy is level. That means the price does not rise for several years. Mostly the level period consists of the first 5 years of the policy. You may find it user-friendly to have fixed costs in the beginning.
When the level period is over, the cost of the policy is to lower gradually. Because your loan’s weight keeps diminishing, you need to pay less.
As most of the insurers offer mortgage life insurance policies, the prices can be competitive. You can shop around and find better rates.
Also, it is possible that you buy more than the amount of your outstanding loan. Your family members can use the extra money to meet their financial needs.
Cons of Decreasing Term Life Insurance
Despite many claiming decreasing term life policies to be inexpensive, the fact is it is outrageously expensive. Offset against the level term, it can be 250% or more costly for you. According to State Farm’s sample rates for a 25 years old Illinois woman, the monthly cost for $250,000 for a 30-year level term is $20.23. But she pays $22.45 for a 30-year decreasing term life insurance policy for her coverage of only $100,000.
Short Level Period
Level term period of an insurance policy is the time until when your price does not go up. This period for a mortgage term life insurance policy is too short. When short initial period is over, your premium rates change. Though usually the rate goes downward, insures leave it to be a matter of ‘subject to change’. They even say the rate may rise or lower after the level period.
Despite being life insurance, mortgage term insurance is designed for the mortgage. The future of the policyholder’s dependents remains unattended on this policy. As a result, it falls short of being life insurance in its strict sense.
No Surrender Value
People often disburse their loans earlier than scheduled to remain in the stress-free zone. It is unfortunate that decreasing term life insurance does not have a refund offer if the policyholder cancels the policy.
No Maturity Value
The decreasing term has only an expiry, no maturity. As such, if the policyholder survives the term, he receives nothing. The benefit of the decreasing term insurance comes off only when the policyholder dies inside of the term tenure.
Who Is Decreasing Term Life Best For
Life insurance is not something everyone needs. Nor is it something everyone needs the same way. This is true to decreasing term life insurance as well. While others may not find it to be a good choice, you may. In dissimilar situation, exact opposite may happen.
Here are the situations that you may find decreasing term life insurance policy to be useful:
If your spouse a co-breadwinner and the only concern for you is the loan, you may choose this policy. Of course, you need to make sure your partner will be able to handle things well without you.
If you have started a small-scale business in the initial phase you may use this policy in view of possible risks. The initial risks are more lethal in character. And they gradually disappear as your business gets going strong. Then decreasing term life insurance can be a good option for you.
When you have large amount of loans on you, life insurance decreasing term may be a good choice. Having a mortgage life insurance against the loan can be a good decision. You can be sure that in the event of you passing away, the loan will be repaid.
Your loan pressure does not remain the same all the time. Probably you keep paying your debt off in time. If you believe your need for protection will gradually decrease, it is suitable for you.
People currently unable to purchase whole life or traditional term life policy may buy it for a short span. They, however, should make sure that the policy is convertible to other types.
The Bipolar Opinions about Decreasing Term Policy
Even insurance insiders are of opposing opinions as to the usefulness of this policy. Robert Henderson, CDFA, Mystic, CT praises this policy. He opines in Nerdwallet:
“These policies are most beneficial when covering major potential liabilities early on (such as when you have children, mortgage obligations, etc.), but those obligations slowly reduce over time, but still leave you with some death benefit.”
On the other hand, Guy Baker, CFP, AEP, ChFC, Irvine, CA blatantly says, “I have never found decreasing term to be a particularly good buy.”
What Life Insurance Mentors Say
The central focus of life insurance are people who you care for, not the policy. You need insurance because you are probably not on a rock-hard financial base. You have mortgage loans for the same reason. So, when it comes to life insurance, it seems more logical to think of the total future of your beloved ones. Level term life insurance is the best choice for you in that case. After all, a level term promises to fill the hands of your beneficiaries to the full to live well enough behind you. Yes, we are with the majority school who recommend level term insurance.
And yes, we ethically do no speak against any types of the life insurance policies. But this one falls behind our liking. Perhaps you already understand why.