You may have read about decreasing term life insurance but not know what it is. This type of insurance is a kind of renewable term life insurance that has coverage that decreases as the life of the policy goes on. This decreases at a predetermined rate. What this means is that the death benefit decreases.
About Decreasing Term Insurance
The premiums often remain consistent during the contact. The coverage reductions often happen either annually or monthly, depending on the kind of policy you have. The terms might be anywhere from a year to 30 years. That depends on the plan that the company offers.
About the Death Benefit
You might be wondering what the death benefit is. The basic calculation to figure out how much the insurance costs is the death benefit plus the length of coverage.
You will make a couple of choices when getting a policy. First, you will determine how long you want the policy to last for. Then you will determine the amount of money that you need to go to your beneficiaries or your family once you die.
The answer to how long you want it to last for is the term length. You might choose to get insurance for a time period that ends after a certain amount of time has passed. That is term insurance. Or you might get whole life insurance, which will last for your entire life.
The answer to how much money you want your family to get will be the amount of coverage to get. That is the death benefit. For example, you might get a death benefit from a few thousand dollars to millions of dollars.
Usually, the longer your policy is good for, the more it will cost you. That is true when you are getting policy coverage amounts as well. For example, if you get an insurance policy that has a death benefit of a million dollars, it will cost more than if the death benefit is only $750,000.
Saving Money by Decreasing the Death Benefit
If you get decreasing term life insurance, the death benefit will decrease gradually over the life span of the policy.
What this means for you is that either annually or monthly, the amount of money your family will get upon your death will decrease the longer you live.
You might be wondering why you wouldn’t want to give your family as much money. The answer lies in the ability to save money. It is a good idea to know how these policies work and why they might be a good option for some people.
How It Works
Often, people will get a decreasing term life insurance policy that only lasts for the amount of time that they need to cover certain debts. That might include student loans, a mortgage on a home, or car loans.
The amount of debt will decrease over time since you will pay it off. That means that the death benefit of the policy no longer needs to be as high, so that can also decrease. The idea is that you do not need to be over-insured. That means that you are paying more for insurance than you really need.
Getting a decreasing term policy might not be as expensive as a traditional type of term life insurance. That is why more people want to get them.
Understanding the Policy
The idea behind these policies is that as you get older, certain responsibilities and the need for more insurance will go down. Many kinds of decreasing term policies are mortgage life insurance. The benefit of them might be put toward the rest of the mortgage on someone’s house.
The payment structure you have is the main reason this kind of insurance differs from having regular term life insurance. The amount that you get in the death benefit will go down, and this is unique from other kinds of insurance.
By itself, getting a decreasing term insurance policy might not work enough for your individual insurance needs. That is particularly true if you have a family and your dependents need your money. Getting an affordable regular term insurance policy might give you the security that your death benefit can offer during the contract’s life.
Instead, consider this policy for protecting your personal assets. It is also not as expensive as other kinds of insurance are.
Getting Inexpensive Insurance Coverage
Compared to universal life or whole life insurance, decreasing term policies are not as expensive. The death benefit can mirror your repayment schedule for personal debt, such as mortgages. The policies are good for debt that your income or personal assets might not be able to cover. That might include business loans or personal loans.
This type of insurance gives you a death benefit that does not accumulate cash, unlike whole life insurance policies. That means that this option only charges you modest premiums to get comparable benefit amounts.
An Example of How the Policy Might Work
Consider a man who is 30 years old and does not smoke or have other unhealthy habits. He might pay around $25 every month for the premium for a policy that has $200,000 in coverage and lasts for 15 years. That might be customized to go with the repayment of a mortgage.
The monthly cost of the premium for this plan will not change significantly. However, as the man gets older, the risk to the insurance company goes up. As the risk increases, the death benefit can decrease.
By getting a permanent policy that has a face amount of $200,000 might cost you $100 or more every month. With some whole life or universal life insurance policies, the face amount can be reduced if the policyholder uses it for advances or loans. However, they still usually have fixed death benefits.
When Would You Use Decreasing Term Life?
There are a few times when using this kind of insurance might make the most sense for you. For example, perhaps you know that your grown kids are financially independent of you.
And perhaps your spouse already has retirement benefits and income. In this case, the insurance would not be needed to replace your income or to round out money from retirement.
Another time you might want to get this kind of insurance is if you are getting life insurance in order to get a business loan. It can help you secure the loan. You should know for certain that the loan will be paid off before the policy is finished.
Or you might get life insurance to cover a period of time when you are paying off the mortgage. Again, you will want to know for certain that you can pay off the mortgage in the time limit of the policy.
No matter which of these cases might apply to you, you will know that you do not need to have extra money in the time frame that you are getting the policy in. If this is so, then you will want to compare the monthly cost for a policy with a level term insurance policy. Make sure that the premium you are paying for the decreasing policy is really less expensive than your other options.
Comparing Your Options
You might choose to use a life insurance quote tool to do this. They let you get quotes from many life insurance companies, so you can compare your options and decide on the best type of policy for you.
It is important to compare your options because you might be able to spend less for a certain type of policy that better suits your needs. There is no need to pay more to get less of a benefit depending on the policy you get.
What Are the Benefits of Choosing a Decreasing Term Policy?
One of the top reasons that people choose these policies is to protect their personal assets. Small companies might choose to use these policies if they want to prevent themselves from going into debt against operational expenses and startup costs.
With small businesses, if one of the partners passes away, it can be helpful to have the proceeds from the death benefit. The money from the decreasing term policy can be used to fund the operations and help them to continue.
Or it might be used to pay off a percentage of debt that the deceased individual is responsible for. This offers a bit more security, which allows the business to take on loans to continue their operations if one of the owners dies. That way, the company will not go out of business.
Closing Thoughts About Decreasing Term Insurance
It can be a good idea to look into this type of insurance if you have loans that you need to pay off. This insurance offers a bit more security for you and for your helping to pay off any debts if you pass away. It’s worth doing your research to see if this option is right for you.