Many consumers see life insurance as a specific product. At most, they may be aware that there are two basic types: term life insurance and whole life insurance.
But the reality is that there are many different types of life insurance. So many, in fact, that it’s possible to customize a life insurance policy to either a general need or even a very specific purpose.
Even within the realm of term life insurance, there are different types of policies. One that’s not well understood by most consumers – but can work well in a limited number of circumstances – is decreasing term life insurance.
It’s worth knowing about, just in case it’s a policy type that can meet a need you have.
What is Decreasing Term Life Insurance?
As the name implies, decreasing term life insurance is term life insurance at its core. That means it’s a policy designed to last a very specific number of years.
But what distinguishes decreasing term life insurance from level term life insurance is the decreasing factor.
That is, the death benefit of the policy decreases over time. The policy type recognizes that you may need more coverage early in the term than you will in future years.
Like level term life insurance, decreasing term life insurance policies typically run in terms ranging from five years to as many as 30 years.
Typically, however, the death benefit will decline each year the policy is in force.
For example, you may start with a $500,000 decreasing term life insurance policy for 20 years. The $500,000 death benefit will be paid if you die within the first year the policy is in force. That benefit will decline by about 5%, or $25,000, each year thereafter.
That means that 10 years into the plan, the death benefit will fall to $250,000. The death benefit will automatically disappear all the way down to zero after 20 years.
Decreasing term life insurance recognizes the fact that the need for life insurance may decrease over time.
For example, you may take a policy that starts with a high death benefit, while you are young and have a combination of many financial obligations, but little in the way of financial assets to meet them. But over time, as your asset base grows and your financial obligations decline, so will your need for life insurance.
Decreasing term life insurance is designed to fit that type of consumer profile.
What are Decreasing Term Life Insurance Rates?
One of the apparent contradictions of decreasing term life insurance is that while your death benefit decreases, your annual premiums don’t.
You can take a 30-year decreasing term life insurance policy, and while your death benefit will decrease a little bit each year, your premium will remain fixed throughout the term.
Interestingly enough, this means that a decreasing term life insurance policy premium will be lower than that of a level term life insurance premium. That’s because the financial obligation of the insurance company declines the longer the policy is in force.
For example, while a 20-year $500,000 level term life insurance policy will require the insurance company to pay out the full $500,000 death benefit 10 years into the term, a decreasing term policy will require the payout of only $250,000 after 10 years.
The long and short of it is that the premiums for decreasing term will be substantially lower than it will be for level term based on the initial death benefit of the policy. However, as the death benefit declines, the premium paid with decreasing term will be higher in relation to that death benefit.
For example, let’s say you take a decreasing term life insurance policy for $500,000 over 20 years. The annual premium is $500, which looks like a pretty good deal for $500,000 in coverage. But after 10 years, that same premium is paying for a death benefit of just $250,000. And in year number 18, it’s paying for just $50,000.
In that way, decreasing term life insurance is less expensive in the early years of the term, but progressively more expensive as each year passes. However, the cost for the policy over the full-term is still lower than a level term policy with the same death benefit.
Exactly what the premium will be on a decreasing term life insurance policy will be determined by all the same factors affecting any other type of life insurance coverage. Those include the condition of your health, the health of your immediate family members, personal behaviors (like tobacco and alcohol consumption), your occupation, your driving record, and even your hobbies.
When Does Decreasing Term Life Insurance Make Sense?
Decreasing term life insurance makes the most sense when you either anticipate a combination of increased financial assets and decreased financial need in the future, or you’re looking for coverage for a very specific purpose.
For example, let’s assume you’re 30 years old, you have a young family (which translates into high financial obligations), but you’re in a high-income occupation likely to enable you to grow your asset base substantially over the next 20 years.
In response, you take a $1 million decreasing term life insurance policy now to cover your family in the event of your premature death. But since you expect to have accumulated more than $1 million in 20 years, you’ll basically be self-insured, and the need for life insurance will either decline substantially, or even disappear completely.
Other examples are where the need for life insurance is very specific, but temporary.
- You have a large mortgage on your house, say $500,000. Since the loan will be paid off over 30 years, you take a $500,000 decreasing term life insurance policy to pay off the debt should you die any time before the mortgage is fully paid.
- You’re carrying a large amount of student loan debt. If you have a $100,000 student loan, payable over 15 years, you may want to take a decreasing term life insurance policy for 15 years for $100,000.
- You have a significant amount of other debts, like personal or business debts, that will be paid off in a specific number of years. You match those obligations with a decreasing term life insurance policy.
- You may already have a base life insurance policy, like whole life or a 30-year level term policy, but want to supplement your death benefit with a decreasing term life insurance policy to provide additional funds for your children until they reach age of majority. A 20-year decreasing term life insurance policy may get the job done.
As you can see, each of the needs above are very specific. Decreasing term life insurance is designed to work only in highly specialized situations.
There may be others unique to your own personal financial profile that decreasing term will cover well.
Why You Might Want to Avoid Decreasing Term Life Insurance
As you can see from the basic structure of decreasing term life insurance, it’s an even more temporary type of coverage than level term. Not only is the term of the policy limited, but the death benefit steadily declines.
The obvious limitation is that decreasing term life insurance is not generally suitable as a base life insurance policy. Not only will the death benefit ultimately go to zero, but it will also be minimal in the final years of the term.
For that reason, decreasing term life insurance isn’t recommended if you have a more permanent need for life insurance coverage. For example, if you have young children and your greatest need for life insurance coverage will be over the next 15 to 20 years, you may still want to go with a 30-year level term policy so that there will be additional funds for your spouse even after your children are emancipated.
You may also want to consider using both level term and decreasing term in combination. For example, you can select a $250,000 level term policy for 30 years, but add a decreasing term policy for 20 years to cover the payoff of your home and your children reaching adulthood.
The Best Way to Buy Decreasing Term Life Insurance
Decreasing term life insurance is one of those insurance products that comes under the special handling category. That’s because it’s a unique policy type that will work only in a limited number of circumstances.
For that reason, it’s highly unlikely you’ll be able to get decreasing term life insurance through the many online discount life insurance providers. Those companies almost exclusively offer level term life insurance, and only to young, generally healthy applicants with no special needs or limitations.
Decreasing term life insurance is best purchased through an independent life insurance broker. That’s because we work with many different life insurance companies, and know which ones specialize in this very unique type of insurance product. We may even be able to recommend an alternative insurance policy or using decreasing term in combination with another type of policy. Because of the unique nature of decreasing term life insurance, this is often a winning combination.
Rather than conducting a dedicated search to find a decreasing term life insurance policy that will work for you, instead, put our experience to work for you. Let us find the decreasing term policy – or any other unique policy type – for you, helping you save both time and money.*While we make every effort to keep our site updated, please be aware that "timely" information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Huntley Wealth & Insurance Services and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser.