Decreasing Term Life Insurance

Decreasing term is a type of term life insurance. The death benefit shrinks over the life of the policy, but your premiums are usually fixed and consistent.

This contrasts with the most popular type of term life insurance, level term, which offers consistent premiums and a fixed death benefit.

Decreasing term life insurance may be appealing if you are looking for coverage while you pay off a major loan, such as a mortgage.

The idea is that your family may not need as much money once the mortgage — or some other major loan — is almost paid off.

Likewise, when you take out a mortgage, the bank may offer you something called mortgage protection insurance. This is actually a decreasing term life policy, but instead of paying money to your beneficiary, the death benefit is paid directly to the mortgage company.

Decreasing term policies may offer lower monthly premiums than level term policies — but not always.

Level term is much more popular than its decreasing term counterpart. Some life insurance companies don’t even offer decreasing term policies.

Cost is one of the biggest benefits of decreasing term life insurance.

These policies tend to feature more affordable premiums than level term policies, since the death benefit gets smaller over time.

However, keep in mind that while decreasing term policies may feature a lower initial price, you are still required to pay the same premiums, even though the plan provides less coverage down the road.

If you want insurance to cover debts, loans or other major financial responsibilities, decreasing term life may suit your needs.

Level term life insurance policies may be a better option if you want a consistent death benefit for your family.

You can purchase a level term policy, and always decrease your coverage amount later so that the face value shrinks as you pay down corresponding debts.

Plus, if you reduce the face value of a level term policy, your premiums will also go down. Premiums for decreasing term life policies, in contrast, don’t get smaller as your coverage shrinks.

Another option is to use the ladder strategy. In this case, you purchase a few different level term policies and stagger them so that coverage expires at different times.

The ladder strategy may result in lower premiums when compared to purchasing a single level term policy.

For example, a 35-year-old woman may need $300,000 of life insurance coverage but knows she won’t need as much coverage in the future.

If she buys a $300,000 level term life insurance policy for 30 years, she could pay $9,000 over the life of her policy.

However, if she uses the ladder strategy, she could purchase three different level term policies for $100,000 each and stagger them to last 10, 20 and 30 years.

Doing so could cost her just $6,500 over 30 years, or about $2,500 less than buying one large policy.