Decreasing Term Insurance

A Life Insurance Guide

Decreasing term insurance policies will pay your mortgage in the event of death or disability, similar to mortgage life insurance. However, there are a number of reasons to be wary of these types of policies and consider other life insurance options. In this article, you’ll learn why decreasing term insurance might be a bad idea and alternative options for decreasing term insurance.

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What Is Decreasing Term Life Insurance?
Why Decreasing Term Insurance Is Usually The Wrong Policy
Alternatives To Decreasing Term Life Insurance
Pros to Decreasing Term Insurance Policies
Drawbacks of Decreasing Term Life Insurance
Decreasing Term Life Insurance Rates
Who Can Buy Decreasing Term Life Insurance?
Applying for Decreasing Term Insurance
Decreasing Term Insurance Companies
Finding the Best Term Life Insurance Rates

Decreasing Term Insurance Guide

What Is Decreasing Term Life Insurance?

Decreasing term life insurance (sometimes called “mortgage insurance”) can also be purchased for a set term such as 5, 10, 20, or 30 years. A decreasing term life insurance policy’s death benefit gradually decreases—either monthly or annually—over the span of the entire term.

By the time the term is ending, there will be $0 death benefit available. Premiums for a decreasing term life insurance plan will remain the same for the entire contract. This sort of coverage is often taken out by people to secure a mortgage, with the death benefit amount shrinking over time as the mortgage debt is reduced.

Why Decreasing Term Insurance Is Usually The Wrong Policy

The cost of decreasing term insurance policies can be three to five times as much as comparable straight term-life insurance, according to Consumer Reports. Decreasing term life insurance is more expensive and the death benefits of the policy decrease over time.

Plus, the value of this insurance actually goes down as you pay down your mortgage. If you’re worried about burdening your family with mortgage payments, you will be better off buying straight life insurance.

If you have a 30-year mortgage, buy a 30-year term policy in the same amount as your mortgage; it will be less expensive than mortgage insurance or a decreasing term policy. In turn, you will have better

coverage for a better price. There are some scenarios where a decreasing term life policy may make sense, but in many cases, the cost is not justified. You can accomplish the same goal through a standard term policy and save money in the process.

To discuss which policy makes sense for you and your family’s individual needs feel free to contact an agent at Spectrum Insurance Group for a free no-obligation quote.

Alternatives To Decreasing Term Life Insurance

There are three principal kinds of term insurance: level term life insurance, decreasing term life insurance and increasing term life insurance. Over the years level term life insurance has remained the most popular. Below we will explain level and increasing term policies as well as a 4th policy that is used in rare situations.

Level Term Life Insurance

Level term life insurance is a life insurance policy that guarantees to have the same premium for the entire length of the contract. Purchased for a set “term” or amount of time (5, 10, 20, 30 years), the premium and the death benefit remains the same (level) until the end of the term. Many term life insurance policies can be converted to a permanent life insurance policy at the end of the term or can be canceled at any time.

Increasing Term Life Insurance

Increasing term life insurance is the exact opposite of decreasing term life insurance. The policy’s death benefit increases over the life of the policy.  The death benefit for an increasing term life insurance plan increases based on inflation and other variables.

The premium may or may not remain the same, but the coverage is always based on the health of the insured at the time the policy was originally taken out. The change in face amount will always occur at a predetermined date or time such as on the policies anniversary date or when an event occurs (e.g. marriage, birth, etc.).

Re-Entry Term Life Insurance

Re-entry term life insurance is a fourth version of term life insurance that is not nearly as common as the others. In the 1970’s, re-entry term life insurance was introduced to the insurance market. Re-entry term life insurance offers low premiums for a fixed period.

The insurance premiums will remain low if the insured is able to pass periodic medical examinations. Usually, insureds are asked to do a physical every three years or so. Over the course of a 10, 20, or 30-year term policy, it’s very possible the policyholder will see a decline in their health and may face an increase in the premiums.

Pros to Decreasing Term Insurance Policies

Life insurance is broadly intended to cover the cost of burial services, as well as pay off any debts left behind by the deceased. Decreasing life insurance is more specific in that it’s really intended for personal asset protection.

The idea is that as you get older, you will become more financially secure, pay down your debts, and decrease your liabilities. Therefore, your loved ones will require less of a death benefit to overcome any financial burden you might leave behind.

Decreasing Term Insurance Pays Down Mortgage & Other Debts

Decreasing term life insurance is commonly used specifically for one of the following debts:

  • Mortgage
  • Personal loan
  • Auto loan
  • Business loan

Situations Decreasing Term Life Insurance Can Help

Decreasing Term Life Insurance is best for you when:

  • You anticipate your need for life insurance will diminish in your later years.
    For example, if your kids are heading into college and beyond, you may see less of a need for life insurance on the horizon, in which case decreasing term policy might be a smart purchase.
  • You want life insurance to cover your mortgage only. As you pay down the balance on the mortgage, the decreasing term life policy death benefits will decrease accordingly.
  • You are buying life insurance to cover personal or business loans and want your coverage to decrease as you pay off your debt.

In the case of small business owners, having a decreasing term life insurance policy can be very beneficial. This type of term life insurance policy reassures commercial lenders that your company will be able to cover start-up and operational expenses, as well as pay-back your portion of the small business loan.

Bottom Line: if you have a decreasing term life insurance policy then the lenders believe your death will not create additional financial distress for your company and business partners.

Drawbacks of Decreasing Term Life Insurance

Decreasing term life insurance has some good qualities. However, there are a few drawbacks worth noting:

  • The beneficiary of decreasing term life policy is often the creditor, not your loved ones
  • You pay the same monthly premium for a decreasing death benefit
  • There are very limited carriers, as decreasing term life insurance is fairly outdated
  • No cash surrender value. If you terminate the policy before the end of the term, you will not receive any kind of payout or return of premiums

Decreasing Term Life Insurance Rates

As with any life insurance policy, premiums are unique to each individual. You will want to shop around using an online life insurance quoting site or by working with your licensed independent life insurance agent.

The more life insurance companies and policies you have to consider then the better chance you have of finding the right coverage for your budget.

We’ve put together an example to give you an idea of the possible cost of a decreasing term life insurance policy:

In our example, a 31-year-old male who is a non-smoker might pay a premium of $27 per month throughout the life of a 15-year $200,000 decreasing term policy. The monthly cost for the level-premium decreasing term plan does not change.

As the insured ages, the risk of the carrier increases but the premiums stay consistent. Over the course of the 15-year term, the death benefit will decrease. Usually, the face amount decreases slowly at first and then rapidly as the end of the policy grows near.

Couple pays mortgage with decreasing term life insuranceBy contrast, a permanent policy with the same face amount of $200,000 could require monthly premium payments of $100 or more per month. The policy has a fixed death amount of $200,000 for the entire contract.

Many permanent insurance policies allow policyholders to take a cash loan on the coverage. The loan amount that is advanced from the policy will reduce the overall death benefit by that amount.

So if our 31-year old male decided to take a cash loan of $50,000 from his permanent policy and didn’t repay the loan before passing away, his beneficiary would receive $150,000 (the remaining amount).

Who Can Buy Decreasing Term Life Insurance?

People between the ages of 18 and 75 may purchase a decreasing term life insurance plan. Premium prices vary according to age and health same as most other life insurance policies. The younger and healthier you are, the lower your rates will be.

Over the last twenty years, decreasing term life insurance has become harder to buy because fewer insurance carriers offer this type of coverage. It seems traditional term or permanent life insurance policies are generally considered sounder investments because the death benefit remains fixed.

Millions of senior citizens currently live on fixed incomes with little money left at the end of each month. The idea that most Americans will become “self-insured” as they age seems very unrealistic these days.  

This is why insurance agents tend to caution against decreasing term life insurance and usually recommend it’s best to purchase a traditional term or whole life at the earliest, healthiest age possible. Even after large debts like mortgages and business loans are paid-off, your family may still need a sizable life insurance policy after your passing.

Applying for Decreasing Term Insurance

As with a traditional life insurance policy, you will typically be required to take a medical exam as a part of the application process. This will entail you meeting with a paramedical professional. The paramedical professional (usually a nurse) will come to your home for the medical exam.

The nurse will draw blood, collect urine, and talk with you about your health history. The blood and urine specimen will be tested for any additional health conditions that could pose a future risk. Once all of the information has been reviewed by the underwriters, a final decision can be made regarding coverage and premium.

It’s important to always be honest on your life insurance application. One of the biggest details life insurance applicants leave out is the fact that they use tobacco (cigarettes, cigars, pipes, e-cigarettes, chewing tobacco, nicotine patches or gums). It is tempting to not mention the social smoking you do a few times a month or the cigars you enjoy on special occasions since tobacco will double life insurance premiums. However, not disclosing the full truth can compromise your life insurance policy later. Also, lying on a life insurance application is considered insurance fraud, and is a federal offense.

Decreasing Term Insurance Companies

Decreasing term life insurance has declined in popularity over the last twenty years but it is still available. There are plenty of high quality life insurers offering decreasing term (“mortgage”) life insurance. Below are a few life insurance companies we recommend.  

5 Best Decreasing Term Life Insurance Companies

Company A.M. Best Rating Customer Reviews
Banner Life A+ 4.3 / 5
Prudential A+ 4.2 / 5
Protective Life A+ 4.1 / 5
Columbus Life AA 3.9 / 5
John Hancock A+ 4.0

To get a better idea of what decreasing term life insurance may cost, here are examples of decreasing term life insurance quotes for a 40-year-old individual, non-smoker, best health class available. As you will see, the estimated rates for a decreasing term life insurance plan are not that much different from a standard term life insurance policy.

Face Value Male Rate Female Rate
$250,000 $32.40/mo. (Prudential) $22.33/mo. (Protective Life)
$500,000 $60.75/mo. (Prudential) $44.63 (Columbus Life)

Deciding whether decreasing term life insurance (aka “mortgage” insurance) is right for you is something you will have to personally decide. The most important thing is to look at your family’s current financial situation and envision 10, 20, or 30 years down the road.

How may your financial future look? Will a traditional life insurance policy afford your loved ones the most security? Or is a decreasing life insurance policy the perfect solution for your large debts such as mortgage and business loans?

Finding the Best Term Life Insurance Rates

When purchasing any type of life insurance, the best thing you can do is educate yourself.

With so many life insurance options out there, it can get overwhelming.  Speaking with a professional is entirely free.

Our independent life insurance agents represent over 50 of the best life insurance companies, and will work with you directly to uncover your family’s financial needs, and find the policy, price, and provider that is best for your situation.

Get started today with our online quote engine, or give us a call to find out if decreasing term insurance or another option is right for you!

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